A recent note by strategists at JPMorgan suggests that several beaten-down tech stocks could finally be worth considering based on their attractive valuations.
“On the price-to-sales metric, non-profitable tech is closer to outright cheap territory, as are payments, after being at record highs a year ago,” JPMorgan Chase & Co (NYSE:JPM) strategist Mislav Matejka said in a new note to clients.
According to Matejka, there’s a strong possibility that growth stocks could far outperform value picks in the short term.
“Bond yields could be more range bound from here over the next few months, rather than upward moving,” Matejka wrote.
He went on to explain that, as the activity data flow moves closer to contraction territory, the Fed could become more balanced in their messaging, point of peak hawkishness would have been passed.
He noted that the gap between breakevens and bond yields is now closed and unless oil price spikes again, inflation forwards could settle.
“The upward repricing of nominal bond yields, and the move in real rates from -100 basis points to +50 basis points, was a constraint for the valuations of the long duration part of the market, but that could temporarily ease,” he added.
Growth stocks have been the major casualties of the current bear market as investors anticipate higher interest rates from the Fed, which would gut valuations and substantially discount future growth.
To better illustrate this, the Vanguard Growth Index Fund, which features growth stocks like Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Meta (NASDAQ:META), declined 28% year to date compared to the S&P 500’s 19% drop over the same period.
Netflix (NASDAQ:NFLX) and Roku (NASDAQ:ROKU), which were once growth investors’ darlings, have also taken a beating declining 70% and 61%, respectively, this year. Even legendary stock picker Cathie Wood’s ARK Innovation ETF has seen a 50% drop this year.
As a result, investors have piled into what they consider value plays or companies that appear to have significantly low valuations coupled with predictable cash flows. Therefore, it is unsurprising that the Vanguard Value Index Fund consists of some of the most popular value stocks, Berkshire Hathaway (NYSE:BRK-B) and JPMorgan (NYSE:JPM) shed only 9% this year.
Low Valuations Made Tech Stocks More Appealing
However, there is no denying that some of these tech stocks are starting to look quite appealing due to their depressed valuations. The S&P 500 technology sector forward price to earnings ratio, for instance, is about 19x, the lowest level since the beginning of 2020, according to Yardeni Research. Furthermore, it is becoming clear that the easy money on the short trade has already been made, considering the Nasdaq 100’s massive 28% plunge this year. The chances of a further decline in the sector are extremely limited, making this the perfect time to consider these undervalued tech stocks.
This may have been a challenging year for investors, but a select group of tech stocks have managed to continue growing their top and bottom lines despite weakness in their share prices. For instance, according to Bloomberg, Alphabet, Apple, Microsoft and Meta are expected to report some of the biggest earnings in the upcoming earnings reports.
At the moment such tech stocks with solid future prospects have been priced at considerably reasonable valuation multiples that have the potential to expand once inflationary pressures cool off.
But not everyone on Wall Street is convinced that now’s the best time to get into beaten-down growth stocks. Danan Kirby, client portfolio manager at Ariel Investments, told Yahoo Finance Live that he would recommend investors look at value-based equities or companies producing cash flow now rather than in the future.
Ultimately, investors should remain cautious considering that if inflation moves higher, the Fed could become more hawkish and increase interest rates again, which could lead to higher bond yields dealing yet another blow to growth and tech stocks.
Featured Image: Depositphotos @SergeyP
