Daily Gains Letter

Déjà Vu of 2000?: Tech Sector Valuations Look Suspect

By for Daily Gains Letter |

Why Believe Tech Sector Looks SuspectIn a recent editorial, I discussed the potential red flags surfacing on the chart of the technology-laden NASDAQ. While I’m cautious, especially after its multiple failures to hold at 4,000, my view is that the technology sector stocks are the most vulnerable at this time, given their recent advance.

In the months leading up to early 2000, I recall the explosive buying in the technology sector was based on assumptions and speculations, rather than concrete, solid analysis.

While the recent buying in the technology sector—especially high-momentum technology stocks—was overdone, it was really nowhere close to what we witnessed back in 1999–2000, prior to the stock market imploding. I recall the surge of technology penny stocks trading under $1.00 to over $10.00, and in some cases to over $25.00, which was absolutely ridiculous at the time.

For some of you who were trading during that time, there was a wireless play called United Broadband Systems that was promoted as the next generation of wireless technology. At that time, technology and wireless were extremely hot and speculative. For one of my speculative market letters at that time, I advised readers to buy United Broadband at $0.25 as a speculative gamble. Heck, there was minimal financial history, but what I liked was the company’s story and that was good enough for me! Remember: the company was based on speculation, not on fundamentals, but we were able to turn an impressive profit.

When I see what is happening in the technology sector today, I am reminded of 14 years ago, but today’s technology sector is in no way as euphoric or crazy as it was back then.

It’s true that some of the valuations of the high-momentum tech plays are out of whack and should be avoided at this time, despite the correction in these shocks.

Hedge fund manager David Einhorn of Greenlight Capital, Inc. is bearish; he recently suggested that “we are witnessing our second tech bubble in 15 years.” (Source: Greenlight Capital, Inc. letter, Street Account web site, FactSet, April 22, 2014.)

While I don’t agree that the technology sector is at the same risk as it was in 2000, when the NASDAQ eventually lost a staggering 70% of its value, I do feel the risk is high.

Companies like Netflix, Inc. (NASDAQ/NFLX), Twitter, Inc. (NYSE/TWTR), Yelp Inc. (NYSE/YELP), LinkedIn Corporation (NYSE/LNKD), and Facebook, Inc. (NASDAQ/FB) are still trading at excessive valuations. I wouldn’t be buying at the current prices.

In fact, stocks in the technology sector—especially these high-priced, high-volume stocks—are vulnerable.

My message is to stay out for the time being. If you own some of these stocks, I suggest you lighten your load and wait to see how things settle.

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