Investors poured $1 billion into tech stocks last week, the highest annualized pace in 15 years, according to research by Bank of America Merrill Lynch, a division of Bank of America Corp. By contrast, a total of $8.9 billion was withdrawn from equities overall during the same week, per the same Merrill Lynch report, according to Bloomberg. The mania for tech stocks persists despite rich valuations and last week's pullback in tech shares amid growing concerns that President Donald Trump's proposed tax break for repatriated overseas profits won't get enacted, the Wall Street Journal reports. The ten largest tech companies have accumulated a $545 billion pile of cash abroad, waiting to be redeployed in the U.S. for everything from stock buybacks to dividends should a repatriation tax break pass.
Doubling Down on Winners
The five biggest contributors to the gain in the S&P 500 Index (SPX) so far this year are tech stocks, per analysis by Bloomberg, all up by an average of 26%. These five are Apple Inc. (AAPL), Alphabet Inc. (GOOG), Amazon.com Inc. (AMZN), Facebook Inc. (FB) and Microsoft Corp. (MSFT). They represent five of the six largest U.S. companies by market capitalization, along with Warren Buffett's Berkshire Hathaway Inc. (BRK-B), per CNBC.
Hedge funds were net sellers of Apple, Amazon and Alphabet in the first quarter, missing out on continued gains, Bloomberg says, speculating that these fund managers may regret their premature sales and are diving back into techs. The tech rally is not confined to the biggest players. Overall, 84% of tech stocks are up so far in 2017, Bloomberg adds. (For more, see also: Why Investors Are Doubling Down on Tech Stocks and Why Mega Tech Stocks Will Win Longterm.)
Significance of Overseas Cash
There is good reason that investors view profit repatriation positively for the techs, and also good reason for concern that it may not happen. The Nasdaq Composite index and stocks such as Apple, Google and Facebook slipped sharply last week on news of the expanding political crisis at the White House, which may dim the chances of any repatriation happening. Overseas cash balances account for a stunning 28% of the combined market caps of Apple, Microsoft, Oracle Corp. (ORCL) and Cisco Systems Inc. (CSCO), the Journal computes. These cash balances so far have been used as collateral for domestic debt, borrowing that could be reduced significantly if a repatriation tax break passes, the Journal reports. (For more, see also: Why Corporate Bond Issuance May Plunge.)
While the big tech names sport high valuations, the Journal notes that their price-earnings (P/E) ratios would drop significantly if you deduct their huge balances from their market caps. For example, Apple is valued at almost 16x forward earnings, a five-year high, but this valuation drops by about 21%, to 12.7x, if you exclude the company's net cash, the Journal calculates. Similarly, the forward earnings multiples on Alphabet and Microsoft fall by 14% and 9%, respectively, if you exclude their net cash balances, the Journal adds.
Unfortunately, investors may never taste the full benefits of these tech giants' overseas riches if political problems at the White House thwart Trump's plans for a repatriation holiday.