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Ian Lance looks at the potential danger of tech stocks

Ian Lance, UK Equity Income Portfolio Manager, RWC Partners, who co-manages the Temple Bar Investment Trust says anyone who was investing in 2000 when the TMT bubble began to pop will remember that it was the smaller, more speculative end of the market that rolled over first, before the large cap end of TMT stocks followed.

Ian explores this further in his latest article Canary in the coal mine

The late American-born British investor and philanthropist, Sir John Templeton, successfully exploited the popping bubble at the start of the new millennium by shorting 88 NASDAQ stocks. His approach, yielding a profit of over $90m, was to focus on stocks which had trebled from their IPO price and place short bets on them eleven days before the lock up period expired in anticipation that insiders would start selling.

A recent chart from SocGen showing that almost a third of stocks on the NASDAQ Composite Index have lost over 50% from their 200 day peak was a reminder of a group of stocks that sank to around 5% of Templeton’s purchase price.

Given this, one might wonder why the NASDAQ Composite Index can be up 21% YTD and the S&P500 Index +25%. The answer lies in that mega cap tech stocks have generated most of the returns, with Microsoft, Apple, Nvidia and Google accounting for around 70% of S&P500’s returns.

Ian comments to look beyond the headline index to see the eye opening activity taking place beneath the surface.

The Goldman Sachs Index of technology companies that have yet to make a profit has declined by 25% in a month, with some huge declines within this, e.g. global taxi app Uber has plunged 48% since April, reducing its market cap to $70bn. Zoom Video, which became a household name during lockdown, has plunged 67% from its peak of $568 on 19 October 2020 to a share price of $183.

In the UK, some so-called tech stocks appear to have been over-hyped by the sell side, including The Hut Group, an online retailer of beauty and nutrition products. Its share price has declined by nearly 80% since its peak. A similar story is the case for autonomous cyber security platform, Darktrace, with a share price of 56% below its high a few months ago.

Of course, it’s entirely possible that this doesn’t herald a rerun of what happened in 2000 but this sort of narrowing of market returns can be a portent of a future decline.

Maybe the disappointing returns in the more speculative end of the market will once again be the catalyst for investors to return to buying stocks based on fundamentals and valuations than ‘hoped for’ future growth.

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