Tech Stocks – Opportunity or Bubble?

I remember the 1999/2000 Dotcom bubble very clearly – I invested in a company called Davnet. There was a time when Davnet had a market capitalisation greater than Medibank and twice that of Qantas.

Davnet listed at 4 cents per share and went to over $4 per share in a relatively short time. I remember clearly buying some at around 30 cents and selling for somewhere close to 90 cents. At the time, I knew others who owned the share – and I was the only one who sold. I was constantly listening to everyone tell me about their plans – what they would buy once it hit $10, and what they would do when it hit $20. At the time I was happy with my gain, but I must admit it took a lot of self-control not to buy back in, there was definitely the fear of missing out. In the end they held until the end. Davnet’s share price reached $6 and reversed overnight. The price my colleagues exited for was nowhere close to what I had received earlier. It was a good lesson about taking profits at the right time.

It is natural for me and many other investors to look at the run in the NASDAQ and worry whether it is another bubble.

The technology businesses have rallied very strongly since the March 2020 lows. Over the calendar year 2020 technology is the clear outperformer. Tech stocks now have a large weighting on the S & P 500, and Apple’s weighting as the largest stock in the index is as high now as any other stock in the history of the index.

In May this year I reviewed our investment performance and based on the impact of Covid 19 had to decide how to reposition the portfolios.

Whilst we had outperformed the market, I was (and still am) searching for a way to structure portfolios that will not all move the same way in future market declines.

What was foremost in my thoughts was how do I structure a portfolio for true diversification. When the markets tumbled in March everything went down - even gold and credit as investors paid a premium for liquidity (cash).

In reviewing the reaction of the governments and regulators to the market crash, my take was the GFC was a simulator for them. They were quick to act and already understood what was needed to avoid further damage.

My view in May was a more positive outcome than most commentators had predicted was likely. I was quietly optimistic but still weary of further pullbacks. If I’m honest, I expected another pull back before we moved to the current levels at the end of the year.

This view was not based solely on the stimulus measures being the solution to all ills. It was more that I felt governments resolve to do what was necessary and maintain economies, so that we can recover once we found a way to live with Covid.

The market is forward looking, and so I felt the market would look through this year’s earning into the following years.

So, what did I determine form my review?

There is no Dotcom bubble to the degree there was in 1999/2000. The companies that make up the Top 20 in the NASDAQ today are highly profitable, with strong balance sheets. Valuations are high but not yet in bubble territory. Although the price to earnings ratios are elevated, at least this time round we have genuine earnings, with some notable exceptions of course.

What I did decide though was that like Dotcom bubble there are some stocks that are rising because they are tech stocks, even though they do not appear to have a long-term road to profitability.

So, the takeout was - don’t avoid tech, but be selective in what you choose. I would never have thought we would make a choice to add high PE stocks as a defensive play, but that is exactly what we chose to do.

Our choice in Australia has been the likes of Appen, Megaport, NextDc and Xero.

We did buy Afterpay but sold well prior to its current highs. Time will tell if I made the right call here.

Internationally we picked out Asian IT stocks as representing good value, as well as adding holdings to cyber security. We still have a weighting to US tech stocks but have avoided directly targeting them for the moment.

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