An interesting email

This is a little excerpt from Mitch Zack’s free email letter that I receive from time to time in my email. I thought you’d find it interesting. Mitch is the primary portfolio manager at Zacks Investment Management and oversees all investment management activities at the firm.

Technology stocks trade at more than a 10% premium to the broader market, which is significantly higher than the post-crisis 4% average.

But in my view, a closer look shows that maybe technology stocks should be trading at a higher premium, given that companies in the tech space are more profitable than the S&P 500 average. The current return-on-equity (ROE) for tech names is over 30%, which is nearly double the average ROE for S&P 500 companies. If you look at technology companies through a lens of price-to-cash flow versus the traditional price-to-earnings, the premium starts to make more sense.

Because technology stocks are in high demand and trading at a premium, they also tend to get beat up badly during market pullbacks… But that’s also precisely why market pullbacks can boost the case for long-term ownership of quality tech stocks.

As I write, the S&P 500 is up approximately +20% for 2019, but technology stocks … are up nearly +30%. In short: Getting beaten up on the way down can often give long-term investors attractive entry points. If you believe that there is a strong case for secular growth in the technology sector – which I do – then it follows that high-quality technology companies with competitive advantages have an opportunity to potentially deliver strong earnings growth for several years to come. Market pullbacks just make them temporarily cheaper.

He must have been reading our minds!:grinning:

Saul

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Hi Saul,
I didn’t want to post this on its own thread, but this article seems to compliment what your saying above and I found it interesting because it confirms in theory what I’ve been feeling since June.

I emailed you back in June with my concerns about the flood of IPOs coming to market and how it might effect the hyper growth names. If it would dilute interest as there were so many other “hot” companies coming to market at sky high valuations.

https://seekingalpha.com/article/4293910-peloton-busts-ipo-g…

This author/investor I think brings up a few good points. He thinks and I agree that in an act of greed by big private equity like SoftBank, there was a rush to bring companies like most recently Pendleton to market as the market was red hot and valuations didn’t seem to matter. That’s suddenly changed now and we are seeing the effects with a selloff and a repricing of hyper growth.

He sees this as a good thing longer term and mentions CRWD and others getting caught up in the sell off, which longer term will be good for them because they are real companies with great growth.

What I am doing and so far it’s working is buying back now the shares that I sold last July, slowly adding back in and will continues to do so through this selloff. Note all my investments in this sector are in my tax exempt account.

Appreciate this board Saul and all that keep it on track. Level heads will always prevail.

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