Worried About The Recent Tech Selloff?

Jimmy Butts's picture

Wednesday, June 21, 2017 - 12:00am

by Jimmy Butts

If you only read the headlines on Friday, June 9, you might have thought that financial Armageddon was upon us. Major tech companies like Apple (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT) and Google parent Alphabet (Nasdaq: GOOGL) fell as much as 6% in intraday trading. Meanwhile, the technology sector fell 1.53% and dragged the Nasdaq Composite Index down 113 points, or about 1.8% for the day.

The selloff in tech stocks continued into Monday. Headlines screamed that this could be the start of the next major selloff and warned that this major bull market could be nearing its end. 

I hope you didn't listen.

Since June 8 -- the day before the selloff -- the Nasdaq Composite Index is down only 2.5%. Meanwhile, its counterparts the S&P 500 and Dow Jones Industrial Average have fared much better, with the S&P 500 up 0.52% and the Dow Jones up 1.57%. 

But what's perhaps more interesting is the fact that just a handful of stocks caused Nasdaq to slide. The companies I mentioned above -- Apple, Microsoft and Alphabet -- plus Amazon (Nasdaq: AMZN) and Facebook (Nasdaq: FB) account for nearly 75% of the index's weighting. 

Just consider, the Nasdaq Composite Index is comprised of 2,576 stocks, but it's weighted according to a firm's market capitalization. The five companies above have a combined market cap of more than $2.8 trillion (the next 10 largest companies have a combined market cap of just $1.2 trillion). So the index is heavily weighted in their favor. Of those 2,500 some stocks, roughly half were in positive territory during the Nasdaq's "big" two-day slide. 


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So while the big boys had a tough couple of trading the large majority of stocks in the index were just fine.

However, if the recent rout in tech stocks did have you worried... well that just goes to show you how risk averse we are as humans (and is probably a sign that you're over-allocated to equities). But you must remember pullbacks and corrections in stocks and the broader market are normal, and quite frankly healthy for the market. Just look at the year-to-date returns for the "big five" stocks in the Nasdaq as I write this:

The 'Big Five'
Company Market Cap Year-To-Date Return Recent Pullback(6/8/17 - 6/12/17)
Apple (AAPL) $780.0 Billion 25.60% -6.2%
*Alphabet (GOOG, GOOGL) $681.4 Billion 24.15% -4.2%
Microsoft (MSFT) $551.8 Billion 13.60% -3.0%
Amazon (AMZN) $481.3 Billion 33.28% -4.5%
Facebook (FB) $449.7 Billion 32.89% -4.1%

 

These companies have had tremendous runs so far this year. So a pullback of as much as 6% shouldn't be a major concern at this point. It's simply some profit taking. But I would be surprised to see more of it. 

The Tech Pullback As A Dress Rehearsal
The recent rout in stocks does provide a good reality check for investors. Again, if you were overly worried, that's probably a sign that you're over-allocated toward equities. But more important, this slight pullback was a nice dress rehearsal for how to react when a larger correction does come -- with the main lesson being: don't panic. Step back and look at the broader picture of your portfolio. Are you more heavily weighted in one sector or in a handful of stocks? If so, consider taking some profits off the table.

Then consider some of the holdings that are being hit the hardest and take a look at your original investing thesis to see if it's still intact. For example, we own social networking giant Facebook (Nasdaq: FB) in my premium newsletter, Top Stock Advisor. As I write this, it's down 3.2% since the start of Friday's rout. But has anything fundamentally changed with its business and future growth?

A quick look at some equity multiples is a great starting point. Facebook is currently trading at a price-to-earnings ratio of 39; its historical five-year average is 42.9. It is trading at 31 times free cash flow, which is still about 37% below its five-year historical average of nearly 50 times free cash flow. So from multiple standpoints, the company is still in great shape.

Moving on to some fundamentals, we can see that the company grew revenue 54% in 2016 over 2015, bringing in more than $27.6 billion. And sales are anticipated to grow 40% this year. Earnings are stellar as well. In 2016, Facebook reported earnings per share of $3.49, a 170% jump over the year prior. In 2017, earnings per share are expected to come in nearly 60% higher at $5.50.

And the company isn't resting on its laurels. It continues to seek out growth through acquisitions and new product developments like Oculus Rift, its virtual reality business. Management plans to spend roughly $7.5 billion to ensure it continues its exceptional growth rate.

Taking time to look through your portfolio to understand why you're invested in each position and what role each company plays in the broader portfolio can help calm your nerves during uncertain times in the market. 

As far as Facebook is concerned, all the boxes still check. 

Multiples? Check. Fundamentals? Check. Future growth? Check.

In other words, our investing thesis is still intact. In Top Stock Advisor, we're up 26% in the short 12 months since we added the stock to our portfolio, easily beating the S&P 500's 15.8% return over the same time frame. 

Facebook is just one of the winning positions we hold in my newsletter. To learn how to gain access to our portfolio, go here. But we use the same sober, long-term approach for all of our holdings -- and you should, too. If you'd like to get more of my analysis, picks -- and some grounded investing advice along the way -- I invite you to join me.

Jimmy Butts does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.