By David Bailin
Chief Investment Officer
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There’s widespread talk of a bubble in technology equities. We assess the evidence and how to respond.
There is talk of a bubble in technology stocks. Still, this is not a “Dot Com” repeat. There is no tech sector recession in sight as there was in 2000. That said, in 2020 we have seen a “lift-off” where market caps are trending upwards faster than free cash flow and profitability.
Fundamentally strong tech companies may end up a victim of their own success. Before the pandemic ends, investors must assess the sustainability of growth for many firms. Rising Free Cash Flow (FCF) and profitability may be elusive relative to rising expectations.
We recommend an analysis of US large cap US tech-related holdings within portfolios to avoid total holdings exceeding 20% of portfolio wealth. For those with significant overweight we propose several strategies including selling the right to purchase a portion of the shares as an immediate income source, that can be used for further portfolio diversification.
Let the reporting games begin! Traders seeking outperformance from 2Q EPS results have a short-term focus. They often look to position themselves ahead of positive EPS surprises, strong guidance, and then sell on profitable trades. For long term investors we note that EPS surprises and returns over a mere 90-day investment period are barely correlated.
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