Value investor David Katz worries about tech valuations, but still owns these mega-cap names

Published Tue, Aug 4 20202:45 PM EDTUpdated Tue, Aug 4 20202:52 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Key Points

Value investor David Katz told CNBC that he is worried about the prices of some large technology stocks after months of strong gains.
"If you look at technology now, there are a lot of companies that are at 30, 40, 50 times earnings, and we think historically when you're buying at those prices, bad things can happen," Katz said on "Squawk on the Street."
Even so, the chief investment office of Matrix Asset Advisors said there are mega-cap names he still has in his portfolio.

(This story is for CNBC Pro subscribers only.) Value investor David Katz told CNBC on Tuesday that he is worried about the prices of some large technology stocks after months of strong gains. "If you look at technology now, there are a lot of companies that are at 30, 40, 50 times earnings, and we think historically when you're buying at those prices, bad things can happen," the president and chief investment office of Matrix Asset Advisors said on "Squawk on the Street." Even so, Katz said there are some tech titans with stocks worth owning as he remains bullish on the market in the next six to 12 months. Katz's comments come as stocks have pieced together a four-month win streak after bottoming out in late March following a coronavirus-induced sell-off. The stocks of companies like Apple , Amazon and Facebook , have been particularly standout performers during that stretch and helped power the Nasdaq Composite to fresh record highs, including at Monday's close. At the same time, the rally has sparked valuation concerns from Katz and others. The tech-heavy index recently reached its highest price-to-earnings ratio since 2005, according to FactSet. "We think people are buying technology now simply because it's going up. Nobody cares about valuation. It went up 10% last month, so why shouldn't you buy it?" Katz said. "That's usually a warning sign." However, he said he does not look at all large-cap tech names the same. Tesla is a high-flying stock that he would avoid. He said that's also the case with Netflix , whose shares have risen 57% this year and are trading around $507 each. "About five years ago, Netflix had no competition," he said. "Right now, they've got about 10 really good, aggressive competitors, whether it's Amazon, Apple, [ ViacomCBS ], Disney +., are all getting into their space." "Right now, Netflix sells at about $225 billion market cap. ViacomCBS sells at about $14 billion market cap. We just think there's just excessive extremes. When Netflix is at 75 times earnings and Viacom is at 6.5 times earnings, those things typically don't last," he continued. Apple, by contrast, is still a stock worth owning despite its nearly 50% gain so far in 2020, he argued. "We think Apple is absolutely fine. We think Microsoft is expensive but has wonderful prospects, so we think that's fine. Same thing with Facebook," he said. Apple and Microsoft, in particular, have had a "great ride," he said. "We're still own them. We're holding them. We just think that they're probably going to be OK, whereas other areas of the portfolio we think are going to be exceptionally good." In general, Katz said Matrix Asset Advisors is not bearish on Big Tech. "We're cautious about getting more money into Big Tech," he explained. "A lot of the market, which is doing well in terms of their business, has not seen their stock prices do anything. So we think there are a lot of attractive places in the market. We just wouldn't be plowing money into the Teslas of the world." Some of those stocks include "dull" telecommunication companies such as Verizon and AT & T, he said. Health-care stocks such as Gilead Sciences and CVS also represent attractive investment opportunities, he said. "If you can pay 12 times earnings for these companies, we think you're going to do very well," he said. "The flip side is, we would be not putting that money into 70-plus times earnings."

David Katz, CIO of Matrix Asset Advisors.

Adam Jeffery | CNBC

(This story is for CNBC Pro subscribers only.)

Value investor David Katz told CNBC on Tuesday that he is worried about the prices of some large technology stocks after months of strong gains.

"If you look at technology now, there are a lot of companies that are at 30, 40, 50 times earnings, and we think historically when you're buying at those prices, bad things can happen," the president and chief investment office of Matrix Asset Advisors said on "Squawk on the Street."

Even so, Katz said there are some tech titans with stocks worth owning as he remains bullish on the market in the next six to 12 months.