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“Retail investors are non-professional investors who, instead of keeping their money in the bank or investing it in mutual funds, invest directly in the stock market for higher returns. Often, retail investors do not have in-depth or professional knowledge of the stock market, and that can be a benefit”— Paul Ebeling
Buying shares trading at 40X earnings may not sound like a good idea. But that is exactly what some savvy money managers are telling clients to do.
The head of equity derivatives strategy at Barclays Plc just upgraded his recommendation on Apple Inc. and other technology giants, advising investors to own more of these stocks. Often known as FAAMG, the group is getting a reprieve after lagging behind the market since October.
As stretched as the FAAMGs look, a 35% premium over the S&P 500 Index he says judging valuations based on an absolute level or comparing them to the rest of the market is flawed because it does not acknowledge the growth advantage that these tech giants offer in the long run and the near Zero interest rates. In other words, they deserve a higher multiple because of their superior earnings power.
The more appropriate approach is to measure the shares against their own history. Going by that, the valuation of FAAMG stocks is now on par with marks seen before the VirusCasedemic. By contrast, the S&P 500 fetches a premium relative to where it was in December 2019.
“It’s like saying New York real estate is cheap right now, but it’s not going to be as cheap as Montana ever. It’s cheaper relative to where it was,” he said by phone. “That is still notable.”
The tech giants, once superstars at the Top of the leaderboard, had a tough start to the year. Their total market value rose less than 8% in the 1st 5 months, while indexes tracking commodity and financial shares each advanced more than 20%. The underperformance came during increased Washington discussions about regulations and taxes and as the threat of higher interest rates weighed on richly valued stocks.
The group has climbed 6.3% this month, a gainer that none of the 11 main S&P 500 industries has been able to beat. Without them, the index’s 0.9% gain would have reversed to a loss of 0.4%.
“You really have a group that’s underperformed the broader tape, that is still growing earnings and that’s how they get cheaper,” said the chief strategist at National Securities. “A 30% grower should probably be ascribed something higher than a steel mill growing at 8%.”
The FAAMG’s combined income expanded by an annual average 15% in the past 5 yrs, 4X the S&P 500 as a whole. While their growth is expected to begin lagging this quarter, their edge will likely return in 2-H of next yr, my estimates show.
Have a prosperous day, Keep the Faith!