Tech stocks, especially those in the so-called FAANG group, have become so popular with individual investors and fund managers that they represent hugely overcrowded investments with excessive valuations. This is the opinion of Paul Meeks, the chief investment officer at Sloy, Dahl & Holst, a longtime tech bull who has covered the industry as an analyst or manager since 1992. His latest bearish advice is this: "I would recommend [to] investors, and here's a guy that's been looking at the sector for a long time, to be no more than neutral weight the sector in their portfolios and most likely underweight," per remarks on CNBC. "And, be very careful which stocks to pick," he added.
This represents a dramatic reversal by Meeks, who was positive on big tech stocks in December, expecting the sector to soar by 10% or more in 2018, led by the FANG stocks, per an earlier CNBC report. His new cautious outlook echoes advice from Goldman Sachs Group Inc. (GS) in their recent Investment Outlook report for 2018, which recommends that tech stocks be reduced to neutral weight this year.
So, why Meeks' change from bull to bearish?
To be sure, the S&P 500 Information Technology Sector (S5INFT) has delivered an average annualized return of 12.76% and a total gain of 232% during the 10 years through January 30, per S&P Dow Jones Indices. The FAANG stocks have performed even better during this period: Amazon.com Inc. (AMZN), +1,732%; Apple Inc. (AAPL), +891%; Netflix Inc. (NFLX), +8,327%; and Google parent Alphabet Inc. (GOOGL), +327%. Facebook Inc. (FB) is up 396% since its IPO in May 2012.
By comparison, the performance of the entire S&P 500 Index (SPX) has been relatively restrained over the same period, recording an average annualized return of 7.61% and a total gain of 108%, per S&P Dow Jones Indices.
But that success has made the techs expensive — and FAANGS especially so.
The S&P 500 technology sector has a forward P/E ratio of 19.6, versus 18.6 for the S&P 500 as a whole, per calculations by Yardeni Research Inc. as of January 25. As Yardeni's charts reveal, both valuation figures have been climbing since 2011, though tech is nowhere near the excessive valuations of near 50 that it reached during the Dotcom Bubble years.
The FAANGs look a lot more stretched. Using a different methodology, CNBC derives forward P/E ratios of 27.6 for the tech sector, 22.3 for the S&P 500, and these even higher multiples for most of the FAANG stocks: Facebook, 28.9; Amazon, 222.2; Apple, 14.6; Netflix, 101.8; and Alphabet, 29.6.
In December, Meeks told CNBC that the FANG stocks -- Facebook, Amazon, Netflix, and Google parent Alphabet -- were likely to outperform in 2018, with Facebook and Alphabet being his particular favorites. But now, Facebook is the only member of this group in which he still sees significant potential upside, though on a somewhat contrarian basis. "Pendulums have swung too far in the direction indicating doubt and pessimism with the changes that Facebook plans for its news feed," as he indicated recently in a special note to CNBC.
Regarding Apple, Meeks tells CNBC that he has owned the stock for years, but he has concerns about its valuation right now. That is particularly interesting given that Apple is valued well below the averages for both the tech sector and the S&P 500 as a whole, as indicated above. Apple is due to report earnings on Thursday February 1, and its share price has declined by nearly 6.9% from the close on January 18 through the open on January 31.
The one bright spot that Meeks sees in tech is the semiconductor industry, especially Micron Technology Inc. (MU). Their respective forward P/E ratios are 22.2 and 4.3, per CNBC. According to Yardeni's analysis, the semiconductor group has a forward P/E of 15.5. "Some of the memory based companies have come down in my view way too much," Meeks tells CNBC, adding that "Micron is very interesting here on a semiconductor capital equipment side."