Fri, 13 Jun 2014
With tech stocks overall trading at a 10% premium to fair value, investors must resist chasing momentum, high-growth names that don't generate positive free cash flow.
Pete Wahlstrom: The technology sector is up 8% year-to-date, outperforming the broader market by about 300 basis points.
A couple of notable outperformers have been Apple, which is up 18%, and HP, which is up 25%. A couple of laggards are Twitter, which is down 45%, and LinkedIn, which is down 25%.
All in, we view the technology sector as about 10% overvalued, and we would encourage investors to look at the sector through a long-term fundamental lens and avoid chasing momentum, high-growth names that don't generate positive free cash flow.
For example, although we like companies that are exposed to the big-data theme, we'd be very picky on names that we'd recommend. For example, Tableau is a no-moat name that saw its share price run up 40% in the first two months of the year and then collapse, dropping 40% in the following two months.
On the flipside, we would point investors toward TIBCO, which is a narrow moat, fundamentally undervalued name that trades in 4-star territory. Although the company has stumbled recently, we view it as a good opportunity for long-term investors, as the company generates free cash flow, trades at a 5% free cash flow yield, and still is exposed to the rapidly growing, rapidly evolving predictive-analytics market.