Tech Check with CNBC's Jim Goldman
Tech-The New Flight to Quality?
By CNBC's Jim Goldman
We in the financial media tend to throw around a lot of Wall Street colloquialisms, and in times of severe volatility, one of the most popular is "flight to quality."
You know, bonds, money-market funds, gold, even traditionally solid companies that offer big dividends that can weather the madness better than others, a place to park your money until the wind blows over.
And for some reason, when there's that flight to quality, the sector that takes the biggest hit is "tech."
During the dot com boom, the flight to quality made sense.
These young upstarts were volatile, unpredictable, and growth was measured in eyeballs, not on anything truly meaningful. And for some reason, that thought process continues to resonate today even though big tech is more solid today than ever. Balance sheets are cleaner, growth is far more meaningful, many are sitting on mountains of cash, have little if any debt, and are so much more globally diversified than they they've been in the past.
I guess what I'm trying to say is that when you look at growth prospects and solid financial performers; tech ought to be the new destination when investors are looking to fly to some quality locale.
Last week's "flash crash," (another one of those cool colloquialisms) really shined a bright light on the concept. Apple dipped below $200, Google and Microsoft and Cisco and Intel all got crushed. None changed their guidance; none made any meaningful, material change in their models; their massive cash positions didn't suddenly dwindle. And yet, they all got sucked into the downdraft vortex that left investors far and wide breathless.
I don't argue that some companies' growth on Wall Street tends to move faster than it should; that optimism sometimes gets ahead of reality and companies trade at unfavorably high multiples. Check out Amazon, or Baidu or even Salesforce.com. But when you see a company like Microsoft, or even eBay and Yahoo, trade the way they are, at the levels they're at, and you see what happens during a week like last week, you start to view these companies as real opportunities for the savvy investor. Oracle, IBM, Hewlett-Packard. They all offer such enormous opportunities as leaders in the respective markets they serve, and yet for some reason, at the first sign of difficulty or uncertainty, the so-called flight to quality leaves these high quality companies in the dust.
It's a big mistake.
Look only at the fundamentals, the balance sheets of these high-flyers, and it starts to make sense. Yes, Apple trades at 16 or 17 times next year's earnings. Same with Google. Yahoo's at 21x (which of course takes into account the value of its Asian investments). HP is at 10x. Microsoft is at 12x. Intel's at 11x.
Yes, compared to some, these might seem a little pricey. But compared to their less expensive colleagues on the market, and the industries in which they compete, you have to take into consideration the growth potential and the dynamic expansion these tech stalwarts might enjoy. I mean, even Procter & Gamble trades at 15x next year's earnings. Johnson & Johnson is at 12x. 3M is at 14x. Are those companies less volatile? More predictable? Heck, in this market, who knows? But looking out to the rest of this year, into 2011 and beyond, I'd stack Apple's growth opportunities, Microsoft's growth opportunities, eBay's growth opportunities against any of the other so-called quality stocks and argue the risks taken today are far more mitigated than they might have seemed in the past.
I'm certainly not suggesting that ALL tech is the great investment panacea; that an entire portfolio should be focused on all things tech. I'm not even saying that all tech should be classified as some homogenous kind of safe-haven. The "tech sector" is made up of dozens of sub-sectors: Software, hardware, consumer electronics, enterprise, storage, database, the Cloud, telecom, web, media. Tech is far more complex than merely "tech." But for the stars in their sub-sectors, with balance sheets to match, there's lots of quality here, and investors would be well-served to see some big cap tech as a worthy place to visit on their journeys to "quality."
It cheeses me to no end when I see the Volatility Index soar - it doubled last week alone, and the snap reaction among so many retail investors is to sell low and buy high, riding market momentum, taking what's left of their portfolio and funneling it into bonds and gold. Market downturns become self-fulfilling prophecies and investors throw their concepts of quality out the door and dump everything.
What a mistake.
Stack Apple's or Microsoft's or Google's or IBM's balance sheets against more traditional quality bastions and I think you might be surprised at what you'll find. Should a portion of your portfolio be secure? Absolutely. Should you consult a trusted adviser to figure out how much risk you can stand? Totally! But selling off some of these big tech stars for a more traditional, so-called flight to quality, might be a set-up for such a lost opportunity. Apple as an example was at $199 late last week. Today it's at $253. Not bad.
If we've learned anything from the economic downturn, the housing bust, Goldman Sachs, AIG, the flash crash from last week, it's that fundamentals matter. Solid performance matters. Efficiencies matter. Operational excellence matters. Growth matters. Cash matters. It's the balance sheet, man! Many tech stars have proven time and again through the downturn that they're more than worthy in this new uncertain generation of being called the "new" flight to quality. And investors smart enough to recognize it may be handsomely rewarded for doing so.
Questions? Comments? Email TechCheck@cnbc.com
Questions? Comments? Email TechCheck@cnbc.com