Technology stocks got clobbered last Friday, June 9. Most of the largest tech stocks, including Alphabet (GOOG or GOOGL), Amazon.com (AMZN), Apple (AAPL), Facebook (FB), Microsoft (MSFT) and Netflix (NFLX), fell more than 3%. Prior to Friday, these six stocks surged an average of 30.1% in 2017 compared to a gain of 8.6% for the Standard & Poor’s 500 Index. Alphabet, by the way, is the parent company of Google.
The rise in technology stocks in 2017 has been relentless. The Nasdaq 100 Index has advanced in a record 70% of its sessions this year, and large-cap active funds are now over-weighted in tech stocks by the largest extent ever. On Friday, Goldman Sachs’ head of global securities research, Robert Boroujerdi, noted that the smooth ascent of tech stocks in 2017 created the illusion that their low volatility meant the stocks are low-risk investments. Investors have also been lured into tech stocks because they’re growing sales at a time when the U.S. economy is sluggish.
Technology Stocks: Long-Term Gains, Short-Term Pain?
Technology stocks remain an excellent investment based on the long-term prospects for sales and earnings growth. Forecasts for Apple and Microsoft include earnings growth of 10% per year during the next five years. Alphabet’s growth during the same time span is close to 20%, and Facebook’s is 25%. Earnings at Amazon and Netflix could explode 40% higher on an annual basis. The six companies have consistently exceeded quarterly estimates during the past year, and analysts continue to raise their sales and earnings forecasts for the companies. What’s not to like?
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The steep rise in technology stocks has produced lofty valuations that may not be warranted. During the next few months, I expect stock prices in the technology sector to drop 5% to 10%, with possibly larger declines of 20% for a few tech stocks. Professional investment advisors as well as individual investors have loaded up on tech stocks, and we should know that the current steep rally is unsustainable. Last Friday’s dip may not trigger a selloff, but I know from experience it is better to sell too early than to sell too late.
If you want to avoid the possibility of large losses, I have a few suggestions. First, don’t panic. The U.S. economy is healthy, earnings of most U.S. companies are growing, and an economic recession is nowhere in sight. The stock prices for Alphabet, Amazon.com, Apple, Facebook, Microsoft and Netflix will collectively sell at substantially higher prices two years from now.
Now is an ideal time to rebalance your portfolio. I advise allocating no more than 20% to any one sector. If you find that 30%, 40%, or 50% of your portfolio is allocated to technology stocks, there is no better time to rebalance your portfolio than the present. Sell some of those high-risk stocks that have negative earnings. Reduce your positions in tech stocks that have increased the most. In addition to high valuations, tech stocks may have reached near-term limits, and are vulnerable to the usual summer stock market doldrums.
On Friday, June 9, the Nasdaq lost 1.80%, the Standard & Poor’s 500 dipped 0.08%, and the Dow Jones Industrial Average climbed 0.42%. In my opinion, investors rotated out of tech stocks and reinvested the proceeds in other sectors. This is a good sign, because investors are not abandoning the stock market, they are merely shifting their money into other sectors. The stock market as a whole should fare quite well in the months ahead.
Where Should You Invest Your Money Now?
Which sectors and stocks should you shift your money into? I’ll provide some suggestions tomorrow. The run-up in technology stocks in 2017 has left other areas neglected. Opportunity knocks—you won’t want to miss my Wall Street’s Best Daily scheduled to be published tomorrow.
In the meantime, you can read about current buy recommendations in my Cabot Benjamin Graham Value Investor. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 275 stocks plus my up-to-date predictions for the Dow Jones Industrial Average. Click here to get started today!
Until next time, be kind and friendly to everyone you meet.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More