This Citywire Switzerland article was written by Peter Ahluwalia, CIO at Swisspartners.
Looking at the recent sell-off in the technology sector, which has been an outstanding sector this year, brings to mind the expression 'throwing the baby out with the bath water'.
While 'FANG' refers to four particular stocks, investors have been less discerning and applied it to the sector as a whole.
Observing the internal market action over the past couple of weeks it seems glaringly obvious that investors have sold down the sector on an indiscriminate basis and have rotated into other sectors on an equally willy-nilly basis.
For the thoughtful investor this can almost be viewed as manna from heaven given that not every technology company is on an extreme valuation while every utility, oil or bank stock equally is not cheap.
These sharp moves have been primarily driven by ETF trades and give the diligent active investor an opportunity to outperform the market if they are prepared to ignore the short term noise, do their research and take a somewhat contrarian stand.
In fact within the US market, as an example, it is not difficult to find technology companies trading on early double digit PEs with PEG ratios significantly below 1. In an economy unlikely to produce more than 2% GDP growth this year (the US) companies which can grow earnings at strong double digit levels probably justify some kind of premium to the overall market.
Looking at some real examples, Facebook, while trading at a not insubstantial multiple of 40 times trailing earnings, doesn't look that expensive when looking at its price to earnings growth (PEG) level of just over 1.
In fact, this PEG multiple is at one of the lowest points since 2012. When compared to a 'safer' company like Johnson and Johnson, for example, which trades on a trailing PE of 21 times and a PEG of 2.9x, one could make the argument that it looks cheap.
Apple is another glaring example that has been caught up in the recent rout and trades on below 17 times trailing earnings versus 21 times for the overall S&P500, has a huge free cash flow yield, significant cash balances and could be a beneficiary of new US tax laws. It also remains an emotional stock for investors given its size and this brings opportunity.
Would you believe that Alibaba only trades at a slight PE premium to a company like Proctor and Gamble, for example?
When you look at the 2019 PE estimates you are talking about 23 times forward earnings versus 21 times and given Alibaba's recent bold announcement that they can grow revenues by 45% or more for the next several years and that CFOs normally lowball their figures, it seems likely that there could be some upside to these numbers.
While I am not recommending investors buy or sell any of the stocks mentioned, the lesson to be learned is that the market is not painted in terms of black and white but rather different shades of grey.