Be careful what you pay for
George Kessarios
Chief Economist & Fund Manager
Analyst Insights, Tuesday, 21st of July, 2020
There is a quite roll over happening over the past several weeks that we have not seen for a while. That is, money moving out of the technology sector and rolling over to the broader market. Granted it’s still early to come to any conclusion, however growth cannot outperform value forever, and there are limits to multiple expansion to justify growth.
If we look at chart that depicts the ishares Russell 1000 value ETF vs the the ishares Russell 1000 growth ETF, from about early 2000 until about late 2007, value outperformed growth by a wide margin.
The reason was because the technology sector back then was so expensive, that it made no different how much certain companies grew; their valuations were so far ahead of their fundamentals, that their stock prices still collapsed.
A case in point is Microsoft.
MSFT shares correct by 70% from their highs and it took about 15 years until they reached a new high back in 2015. Other companies like Cisco have still not surpassed their 2000 highs.
The bottom line is that valuations are currently more than stretched for many technology companies and investors should pay close attention to the fundamentals. History has showed you can buy the best company in the world and lose money or underperform for year and years if you overpay. Mind you CSCO is not the only company from the 2000 era that has still to reach its high water mark.
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