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The Tech Opportunity

A large cap company is one that has a total market capitalization of $10 billion or more. 

A blue chip company is a well-established and financially sound company that best weathers adverse times in the marketplace. 

A large cap company is not necessarily a blue chip company. 

I tend to liken blue chips to seasoned corporate veterans. They are mature, solid to their ways and rarely waver no matter if it is good or bad times. 

Large cap companies have the ability to be blue chips, but there are also those high flying large caps. These can be likened to young, hungry workers in a large corporation. They will likely waver more than the blue chips, but upside growth is far greater with them and so is the downside. 

The Tech Dichotomy 

Within the tech sector today, we are able to see a visible split amongst companies’ valuations. 

When looking at the whole, many feel the sector is vastly overvalued. Some even worry that another tech bubble is on the horizon… one similar to what we saw in the early 2000s. And this is a feeling amongst some despite the NASDAQ still being about 600 points from the all time high we saw back in 2000. 

But what is interesting is the division seen within the technology sector with regards to P/E. At the end of last quarter, we took the technology sector ETF, XLK, and looked at the P/Es of the underlying companies. We broke them out based on the company’s age… how long they have been public. 

What we saw was that the companies that were 30 years or younger looked much pricier than those that were 30 years or older. 

The companies that are 31 years or older saw P/Es that were averaging below 20, while the younger companies saw P/Es that were averaging above 30. 

The Large Cap vs. The Blue Chip 

The technology sector isn’t overvalued. Pockets within the sector are extremely overvalued, but many areas within the sector provide great opportunities. 

If investors would focus on actual blue chips within the sector, they would find diamonds in the rough. Companies like IBM and ATT which have been around for 98 years and 138 years, respectively; and, they trade at 11.36 and 13.7 P/Es, respectively. Or even Western Union, which has been around for 163 years and trades at an 11.6 multiple, seems reasonably valued. 

The blue chips are where the current value opportunities lie. It’s the large caps within the space that make people feel the entire sector is overvalued… which is unwarranted. 

Companies like 10 year old Salesforce with a P/E of 113 or Facebook with a P/E of 89. These companies have seen prices skyrocket and earnings grow at a slower pace.

Of course, the investment in these companies is the expectation that their earnings will grow a quick clip going forward. The forward P/E for Facebook, for example, drops to 36… but if earnings don’t meet expectations, then the price is what will fall to bring the P/E down. 

But for those looking for more conservative opportunities would do themselves well to screen the industry by age and find those seasoned technology veterans. These seem to be best positioned from a P/E standpoint at least. 

 

(All data used within The Capital Course was provided by Ned Davis Research) 


 

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