Equity bubbles often die hard -- especially when $1,400 stimulus checks are around to help refill the punch bowl for a little while.
But seven weeks after speculative/high-multiple tech stocks generally peaked, there are a few different reasons to think that (with some exceptions) they're still in the process of deflating, even if stimulus money continues providing some near-term support.
First, most high-multiple tech names remain well below their February highs even after several days of rallying. Though up 14% from its March 30 low, the ARK Innovation ETF (ARKK) is still 22% below a February high of $159.70. And quite a few of the companies that got bid up to exceptionally high valuations -- think names such as C3Ai (AI) , Virgin Galactic (SPCE) , Skillz (SKLZ) , Stratasys (SSYS) and Luminar Technologies (LAZR) -- remain down more than 40% (and in some cases more than 50%) from their highs, albeit still often above where they were trading for much of last fall.
Second, the nature of the bounces these companies have seen since mid-February have by and large made them feel a lot like bear market rallies. Typically, bubble stocks have outperformed either at the start of a market rally, as shorts take profits by covering their positions, or (as was the case on Tuesday) on low-volume days that allow retail investors to have an outsized influence on how high-beta stocks move.
Third, as vaccination rates rise and reopenings gain steam, there are broader signs that retail enthusiasm for engaging in a lot of the asset speculation that has become so popular since March 2020 is cooling off some. Bitcoin has now been range-bound for nearly a month, even though surveys have indicated many stimulus check recipients planned to use some or all of their stimulus money to buy bitcoin. NFT sales have also cooled off a bit, and (based on personal observation) eBay (EBAY) sale prices for many sports cards are off their highs as well.
To reiterate a point made a couple times earlier this year, this tech bubble is a relatively narrow one. A lot of tech stocks are just moderately expensive right now, and some still look reasonably priced in light of company-specific growth drivers and the macro strength we're likely to see during the back half of the year.
Though having rallied some lately, tech giants such as Amazon.com (AMZN) and Facebook (FB) still don't look all that expensive. And while the shares of many chip developers and equipment makers aren't as cheap as they looked in early March, some are still worth a look on pullbacks, given that the demand outlook for the next 12-18 months remains very good and a slew of names continue sporting forward P/Es below 20.
Moderately priced small-cap and mid-cap tech stocks also merit attention, particularly since they've often been collateral damage during bubble-stock selloffs. Names I like that fit this description include haptics IP provider Immersion (IMMR) , which trades for 14 times its 2021 EPS consensus and for now has limited analyst coverage, and Angie's List/Homeadvisor parent Angi (ANGI) , which has a forward EV/sales ratio below 5 and has been shaking things up under new CEO Oisin Hanrahan.
It's become a bit of a cliché lately to say that we're now in a stock-pickers' market, but it's hard to take issue with that saying given how equities have been trading over the last few weeks. As a lot of the speculative excess that formed in some corners of tech is gradually taken out, buying opportunities are presenting themselves in other corners, particularly during corrections.
(Amazon and Facebook are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
