Time and time again, moments of mass panic have created major buying opportunities for investors able and willing to make long-term bets on tech companies with large secular growth runways.
This observer definitely isn’t going to try and predict exactly when the investor panic surrounding the COVID-19 outbreak will subside. Given COVID-19’s ongoing U.S. spread, a slow institutional response and the potential impact of upcoming responses from government agencies, businesses and other organizations on the public mood, it wouldn’t be surprising to see the panic deepen in the near-term before investor sentiment starts improving.
But with that said, as someone who was arguing in December and January (strictly on valuation grounds) that tech investors should wait for a correction before making new buys, the long-term risk/reward looks a lot better for many high-growth tech names -- as well as some moderate-growth names sporting low multiples -- than it did a month or two ago.
From a stock-picking standpoint, one of the silver linings to a plunge like this is that markets tend to be pretty indiscriminate about what gets sold off. High-multiple software and Internet stocks have been particularly hard-hit, and so have tech names with particularly high COVID-19 and/or China exposure, such as chip companies, ride-hailing firms and online travel firms. But on the whole, nothing is safe.
And that, in turn, is creating some very intriguing opportunities within tech, in much the same way that the market’s early-2016 and late-2018 plunges did.
While an investor doesn’t necessarily have to buy stocks at times of extreme pessimism and/or panic to make out well over the long run, the odds of making truly outsized returns go up markedly on such occasions. To give one recent example: While an investor in Roku (one of 2019’s best performers) who bought the stock near its fall 2018 highs would be up around 30% right now, someone who bought near its late-2018 lows would be up around 250%.
Likewise, an investor who bought Lam Research near its mid-2018 highs would be up about 20% today, but one who bought near its late-2018 lows would be up over 100%.
On a big-picture level, a lot of consumer Internet companies particularly look interesting rightto me right now. Giants such as Amazon.com (AMZN) - Get Report and Facebook (FB) - Get Report now trade at pretty reasonable valuations, as do a variety of smaller companies.
And with Chinese manufacturing activity starting to improve, some chip stocks are worth a look at a time when the Philadelphia Semiconductor Index is down 20% from its February peak. Companies such as Micron (MU) - Get Report, NXP Semiconductors (NXPI) - Get Report and Qorvo (QRVO) - Get Report have fairly moderate forward earnings multiples, even if there need to be some haircuts to near-term estimates.
Also, if investors are willing to brave the waters at a time like this, many Chinese tech stocks carry low valuations relative to their growth profiles, in part because they didn’t run up the way that many U.S. peers did from late 2018 to early 2020. Alibaba (BABA) - Get Report is at levels first hit in Jan. 2018, while Tencent is at levels first hit in Nov. 2017.
To reiterate, there’s no guarantee that such tech names won’t sell off more in the near-term, particularly if margin calls and fund redemptions drive a lot of forced selling. But the long-term payoff definitely looks better for them than it has in a while.
Facebook and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club.