As e-commerce giant
Into this brutal environment comes
It's not an optimal time to pitch tech. Internet companies, whose market values ballooned in 2013 amid high hopes, have pulled back in 2014 as investors reassess their prospects.
Tech is the highest-profile casualty of a fundamental shift in investor behavior, market watchers say. Instead of putting money in growth stocks — companies whose earnings rise at above-average rates — fund managers now want shares of safer companies. Instead of hunting for stocks whose prices could double this year, investors want so-called value stocks, companies that are undervalued by the market but pay relatively high dividends, sell necessities, and have mature business models.
"They're killing everything high-growth," says
What they want are utilities, energy and health care. As a result, the three are the best performing industries in the S&P 500 this year — up by 13 percent, 6 percent, and 5 percent, respectively. By comparison, the Standard & Poor's 500 index is up 2 percent.
Despite the tough conditions for Internet stocks, most analysts expect
"It might be safer for
The recent skepticism about tech companies is a reversal of the last two years.
Money poured into high-growth tech companies starting in 2011 because they were the only parts of the economy that seemed to be expanding, market strategists say.
"Many flocked to a few areas — including social media, cloud computing and biotechnology — of the market where high growth seems well assured," says
Technology stocks grew expensive, at least by one measure called the price-earnings ratio, which investors use in deciding whether to buy or sell a stock. To calculate a P/E, you divide the price of a stock by its annual earnings per share.
The P/E for the Nasdaq composite, which is loaded up with tech stocks, hit a four-year high of 24-to-1 on
Some tech stocks remain wildly expensive, even after a recent sell-off.
Besides high prices, another trend has drawn investors' away from Internet stocks. Non-technology companies are starting to see modest increases in sales and profits. Evidence is also emerging that overall U.S. growth is picking up after a tough winter.
"If the economy is getting better, big traditional large-cap stocks are going to look pretty cheap," says
The Russell 1000 index, a value-oriented index made up of mostly large companies, trades at 14.5 times earnings, versus the S&P 500's 16.5.
He thinks that these "bubble stocks" will fall further, although he did not disclose which companies they are. "While we aren't predicting a complete repeat of the (dotcom) collapse, history illustrates that there is enough potential downside in these names to justify the risk of shorting them," or betting that their stock prices will fall.
Even if technology stocks are in a hypothetical bubble, it's a tiny one compared with 2000. When the bubble was at its biggest, stocks in the Nasdaq composite traded at an average of 194 times their earnings, compared with the current 20. That level is a more a normal valuation, based on historic averages.
Still, fund managers warn that investors should expect more tech stock declines, even with the recent sell-off and the early enthusiasm for
"I don't think we are quite finished selling these yet," Nuveen's Doll says. "And when we do finish this rotation, it's going to take a long time to repair the damage."
AP Technology Writer
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