The NASDAQ Composite Index recently surpassed the 5,000 mark, a level not seen since the early 2000s. As a result, some investors are wondering whether technology stocks have entered bubble territory.
But that depends on which stocks you’re looking at, says Mark Lin, vice president and portfolio manager at CIBC Asset Management, and manager of the Renaissance Global Science and Technology Fund.
If investors are interested in the tech sector, he suggests they focus on older stocks such as Apple, IBM and Microsoft. “[These] generally trade at fairly low multiples compared to newer Internet-based names such as Amazon and Alibaba, which is based out of China, ” Lin explains.
“As a matter of fact, if you back out the cash that [mature companies] carry on their balance sheets, many of them trade below the average valuation multiple of the S&P 500.”
In contrast, “newer Internet stocks are trading at much higher valuation[s] compared to the profit they generate, and some of them generate very little profit.” This group includes Facebook, LinkedIn, and cloud computing-based companies such as Salesforce.com.
So, while the market seems to favour high-multiple cloud and e-commerce names, Lin plans to take on low-risk, high-reward positions in old technology companies. “The market likes to see the kind of growth momentum, sales, and revenue [that] fast-paced companies generate. But my sentiment is less optimistic than the market.”
He adds, “Businesses overall should still be valued [based on] the profit a company can generate over its lifetime.” So he’ll continue to evaluate businesses based on their mid- and long-term profits and cash flows, rather than on upswings in valuations.