Jonathan Swift once said it's useless to reason a man out of something that he was never reasoned into believing.
Likewise, it might be useless to expect retail and institutional investors/traders who didn't care about valuations while buying popular growth stocks at nosebleed multiples to care much about valuations as some of those stocks plunge to very reasonable -- and in some cases, very cheap -- multiples.
That's at least one of the key reasons why buying tech stocks has been so treacherous in recent weeks. In the short-term at least, betting on the shares of one company in an industry/sector to outperform those of peers because your fundamental analysis leads you to conclude its valuation is far more reasonable won't get you far (even if you're completely right!) if many of those on the other side of the trade have come to view trading stocks as just a giant video game.
On top of this, an enormous amount of equity trading is now dictated by passive fund inflows and outflows, as well as by quant/algo-based trading strategies that can help drive giant rotations in and out of the vast majority of stocks in an industry/sector. And then there's all the industry/sector-wide selling going on right now due to margin calls and fund redemptions.
One can clearly see the brutal combined effects of these phenomena while looking at the tape for a basket of, say, growth software or Internet stocks on recent down days.
A pretty good argument can be made that beaten-up growth software firms such as Elastic (ESTC) and Zoom (ZM) are a lot more attractively valued than firms with forward sales multiples that are 3 to 4 times as high, such as Confluent (CFLT) and HashiCorp (HCP) . But that's cold comfort for the time being, if high sector correlation caused by investors/traders who have been paying little or no attention to valuation in either direction leads all of these stocks to get hammered to a roughly similar degree amid rising Fed/inflation fears.
The same holds true for cryptocurrencies right now -- only even more so, since crypto trading is retail-dominated to a far greater extent than equity trading, and because virtually every major cryptocurrency that blasted off last year benefited from large-scale pumping/promotion to retail investors of a kind that would make Charles Ponzi blush.
A token such as Ethereum might be backed by user/developer activity and protocol revenue to a far greater degree than something like Dogecoin, but (as the highly correlated cryptocurrency selloffs of the last two months demonstrate) that's mostly academic in the short-term if many recent buyers of the first type of token are fueled by a speculative mindset similar to that of many recent buyers of the second.
The long-term could naturally be very different. Both financial history and logic suggest that in time, a lot of the speculators and FOMO-buyers-turned-panic-sellers will get driven out, cooler heads will prevail and quality assets now available for discount prices will pay off well for investors buying them around current levels.
Looking at tech stocks in particular, the current environment arguably presents more bargains than we've seen at any time in recent years outside of the December 2018 and March 2020 selloffs -- even though there's still a lot of froth in some corners of the sector. This especially holds if (like me) one is optimistic that consumer and corporate spending will remain fairly healthy at least over the medium-term.
Right now, everything from tech giants such as Amazon.com (AMZN) and Alphabet (GOOGL) , to growth software stocks such as Elastic and Zoom, to Internet ad plays such as Roku (ROKU) and Digital Turbine (APPS) , to fintech plays such as Shift4 Payments (FOUR) and PagSeguro Digital (PAGS) , to chip industry stalwarts such as NXP Semiconductors (NXPI) and Applied Materials (AMAT) , can be had for prices that I think present either good or great long-term risk/rewards.
Of course, with the current market environment being what it is, there's no guarantee that the aforementioned firms and others like them won't get meaningfully cheaper still in the coming days. Though only time will tell, it wouldn't surprise me if we still need some true capitulation in Tesla (TSLA) , meme stocks and other equities that retail investors have piled into before a bottom is put in, given all the speculative excesses that took place last year.
Against such a market backdrop, a strategy of gradually building up positions in attractively priced tech stocks might make sense, at least unless we see a true crash that turns a lot of these stocks into truly screaming buys. Arguably, such a strategy balances the risk of missing out on the major long-term payoffs that these stocks can provide with the risk of seeing short-term losses (and missing out on a chance to buy at even cheaper levels) if it turns out this selloff will feature another down leg or two before ending.
(Applied Materials, Amazon and Alphabet are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
