Wall Street has been witnessing a brutal selloff this month, thanks to the coronavirus-led economic fallout. Major indexes are now in the bear market territory, having fallen at least 25% from their all-time highs. Even the sturdier tech sector succumbed.
It is to be noted that technology shares mainly drove the stupendous market rally in the past few months. The sector is still better-placed amid the virus-led market rout. The S&P 500 information technology sector has lost 15.5% this month (as of Mar 19), compared with the 18.4% decline of the broader index.
The sector is favored by most analysts, not only because of its emerging offerings but also for its cash balance. Goldman appears bullish on tech stocks. In early-February, it said that though investor capital has been most concentrated on FAAMG (Facebook, Amazon, Apple, Microsoft and Google-parent Alphabet) in 20 years, events like the dot-com bubble burst are less likely to recur.
Tech companies are cash-rich. As of fourth-quarter 2019, cash, cash equivalents and marketable securities stood at around $452.5 billion. Microsoft is the most cash-rich company globally, with about $134 billion in cash balance. Per an article published on BlackRock, “exceptional profitability has led to exceptional cash-flow generation, much of which is returned to shareholders in the form of buybacks” (read: Microsoft’s Azure Returns to Growth: 5 ETFs to Buy).
From the price/cash flow (P/FCF) angle, the tech sector is cheaper than the S&P 500. Investors should also note that the P/FCF ratio of the computer and technology market now stands at 16.47x against the S&P 500 Composite Market ETF’s P/CF of 17.4x (read: Oracle Posts Best Revenue Growth in 2 Years: ETFs in Focus).
There are more reasons to be enthusiastic about the sector. In the dotcom bubble era, the tech sector’s P/FCF was about 28.92x versus 16.47x at the current level. In 2001 and 2002, the bubble burst, leading to a bear market for equities. But then as well, the tech sector’s P/FCF was higher than what it is now. At the end of 2002, the P/FCF of the tech sector was 19.87x.
Investors should also note that hoarding cash could be a great strategy for the near term as inflation risks may be a distant possibility as oil prices are at almost a two-decade low. Global recession fears are also looming large. Fund managers are of the view that “looking for companies that have strong balance sheets, less debt, stable cash flows and carrying a respectable dividend yield are the preferred plays.”
Against this backdrop, we highlight a few Zacks Rank #1 (Strong Buy) tech ETFs that could be bought on sale (read: Must-Watch ETF Areas on 2nd Fed Rate Cut of 2020 & QE Launch).