According to a recent Wall Street Journal article, certain high-growth technology stocks are up in price more than 50 percent in 2018. Compare that to the S&P 500 Index, which is up about 6.5 percent. Should you move in the direction of a high-octane stock portfolio and dump your stable, diversified investments?
The technology sector continues to deliver staggering annual growth, especially for its enormous size. Is there any price investors won’t pay for these companies? Apparently not: The group sports a trailing price earnings ratio of over 100, according to Reuters. By comparison, the S&P 500 trades around 16 times earnings. Old school GARP (growth at a reasonable price) has given way to GAAP (growth at any price) in the example of large technology stocks.
Lest we all get too carried away, our firm would not speculate on a sector strategy, regardless how attractive its prospects. Many of us own these companies in an index fund like the S&P 500, but we believe it should be in a quantity that goes against one’s risk tolerance should the price drop drastically or suddenly. And if the momentum-driven investor turns tail and runs – or the group fails to deliver on lofty future growth expectations – what then?
Growth companies continue to outperform value companies by nearly 13 percent this year, but we believe you should keep value companies in your portfolio should investor preferences change unexpectedly. Value companies have historically been less expensive, pay higher dividends and the trade is less “crowded.”
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Markets are fickle, and perceptions about large company technology stocks could be fleeting. Regulators, especially in Europe, will eventually have the last word on their dominant business practices, despite the argument that lower prices benefit consumers. Fewer competitors could eventually lead to higher prices.
We get a little nervous when we see a narrow, select group of companies carrying most of the performance load. While tempting, investor preferences for these stocks can change at any time when momentum shifts.
Our firm is willing to trade short-term performance for stability of diversification, and the potential to limit downside losses during the next market correction.
We continue to believe the path to lasting prosperity is a straight one, and there is no free lunch. Gorging on large technology companies could eventually lead to serious setbacks, no matter how tempting the feast looks today!
Mark Daly is an investment management analyst and partner in the Perpetua Group. Mark@ThePerpetuaGroup.com.