Despite the uncertainty with COVID-19, the market is hitting all-time highs.
As of writing, it’s 2.6% higher than its pre-crash level recorded on February 19, when it fell about 34% until the bottom in March.
If you look at this chart, you would think that the whole market has recovered from the crash this year.
But that’s not exactly the case.
During the coronavirus pandemic, the global economy was transformed. Millions started working remotely, global supply chains got disrupted, and transportation ground to a halt.
One-quarter of U.S. employees now work remotely. 13 million jobs have been lost in the U.S. alone since February. Global trade, as measured by the Bloomberg World Trade Volume Index, plunged by over 17% between December 2019 and March 2020.
While many companies got hit hard by these changes, it turned into a boon for others – especially those in the tech sector.
Take a look at this chart of the so-called FAANGM stocks – Facebook, Apple, Amazon, Netflix, Alphabet (Google), and Microsoft – versus the S&P 500 since just before the crash in February.
The Big 6 tech stocks soared by 27% while the rest of the index fell by 8%.
So if you remove those six stocks, the S&P 500 is actually still down since the drop near the start of the year.
This is the new normal that we live in. These tech giants account for 27% of the S&P 500’s market cap. And they’ve dragged this market back to its pre-COVID highs.
We’re seeing this kind of outsized performance in the rest of the tech sector as well. The iShares U.S. Technology ETF (IYW), which holds a portfolio of 166 U.S. technology stocks, is up 18.3% since the crash in February.
Below, I’ll explain why there’s a hidden opportunity in this setup…
The Tech Sector Has Pockets of Value
If you think you’ve missed out on this run, think again…
Here’s what you need to know: Even though some tech stocks are expensive, there are still a lot of opportunities to purchase these stocks at a good price.
The thing is, you don’t want to only look at how nominal stock prices have changed since February.
Instead, there’s a better indicator of whether stocks are “cheap” or “expensive” relative to a company’s value.
I look at valuation ratios. They really tell you how cheap or expensive a stock is.
Two good metrics to use are sales and enterprise value (EV). EV represents the sum of a company’s market capitalization and its debt net of cash. Think of it as the price of the business to a potential buyer.
So a valuation ratio like EV/sales tells you how high the total value of a company is in relationship to its sales.
The lower the ratio is, the cheaper the stock.
And the ratios on about half of the 485 tech companies listed in the United States, with a market capitalization of $1 billion or higher, are lower now than they were on February 19, 2020. Take a look at the chart below.
This tells me that even though some tech stocks are expensive, with companies like Apple and Facebook trading at all-time highs, about one-half of the U.S. tech market is cheaper now than before the COVID crash.
So it’s time to hunt down overlooked tech opportunities. Because tech’s run isn’t about to end anytime soon.
To start, take a look at this ETF: ARK Innovation ETF (ARKK). It holds a portfolio of disruptive stocks that operate in industries like automation, DNA technologies, and energy innovation.
Good investing,
Andrey Dashkov
Analyst, Casey Research
P.S. Tesla is one of the hottest tech stocks around. But my colleague Dave Forest has found an even better tech play.
He’s zeroed in on a company that’s poised to make a multimillion-dollar deal with Tesla. And it could send this tiny company’s shares soaring.
The deal could come out at any moment. You can find out more details right here.