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Bernstein Warns on Tech Valuations

June 25, 2018 12:51 PM

Tech stocks are notably weaker Monday, with stocks like Netflix (NASDAQ: NFLX) falling as much as 6%. In addition to continued trade war fears, Bernstein said in a note to clients today that with its YTD outperformance, for the first time in years, tech has become "meaningfully more expensive". They note the tech outperformance has been entirely driven by an increase in tech's relative forward earnings multiple.

Bernstein analysts, including Toni Sacconaghi, noted while tech's year-to-date outperformance was still disproportionately driven by the sector's 10 largest stocks, these names actually saw their earnings multiples shrink on average. In other words, the outperformance was primarily driven by non-FANG stocks.

"... tech now trades at 1.18x the market's P/FE multiple (cap-weighted), making it the most expensive sector in the market," Sacconaghi said.

Further, the analysts note while growth stocks have strongly outperformed value across the entire market in the first half of 2018, it has been particularly acute in tech. "Tech stocks in the most expensive quintile of valuation outperformed tech stocks in the cheapest quintile by 2100 bps on an equal weighted basis - the most we've seen in the last 15 years," the analyst said.

While the firm was clear with its warning on tech valuations, they are not backing away from the sector.

"While the first half of the year has made us incrementally nervous about valuations, we note that fundamentals have remained strong, crowding continues to improve, and tech typically benefits from seasonality in the second half and in rising rate environments... As such, we continue to recommend both a modest overweight in tech and a balanced barbell between growth and value… although our bias is to add selectively to the value side of the barbell."

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