Home>Video>Pick and Choose in the Overheated Tech Sector

Pick and Choose in the Overheated Tech Sector

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.

+

Video Transcript

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.

  1. Related Videos
  2. Related Articles
  3. Comments
  1. Measuring Moats in Social Media

    Twitter , Facebook , LinkedIn , and Google each have moats, but there are some interesting distinctions among their competitive advantages.

  2. Lynch: The Bigger Threat to Facebook

    Given Facebook's strong network effect and high switching costs, its direct rivals are a smaller concern than something completely different that might divert users' attention away from social networks , say Morgan Stanley manager Dennis Lynch. Plus: Why Lynch lowered his Apple stake.

  3. What to Watch in Tech Today

    Morningstar's Grady Burkett highlights the new dynamics in an increasingly mobile-driven sector, the effect of Europe woes on key players, the hallmarks of durability among social media names, and more.

  4. Danoff, Davis, Lynch: Stock-Picking Ahead of the Crowd

    The past Morningstar Manager of the Year winners favor credit card firms, split views on Facebook , address China's importance, extol executives' foresight for future growth and disruption, and much more in this panel presentation at the Morningstar Investment Conference.

  5. Where to Put Cash in a Fully Valued Market

    Bargains are hard to find, but higher-yielding, high-quality stocks are still among the best available options.

  6. The Interest Rate Risk Factor for Dividend Investors

    Rising rates and inflation could negatively affect dividend-stock valuations, but high-quality equities can offer a two- for -one bargain.

  7. Asness: Splitting the Middle on Market Efficiency

    Markets are very good with long -term price accuracy, but they are neither perfectly efficient, nor prone to regular bubbles, says the AQR founder.

  8. How to Handle the Markets' Mixed Messages

    The stock market remains very bullish on the economy, but the bond market is telling investors to be cautious.

blog comments powered by Disqus
Upcoming Events
Conferences
Webinars

©2014 Morningstar Advisor. All right reserved.