'Facebook's in a great place': Why one fund manager thinks tech stocks are a buy

Published Thu, Jul 22 20218:11 AM EDTUpdated Fri, Jul 30 202111:23 AM EDT

Investors should have exposure to high-growth technology stocks, according to one investment manager whose fund owns Facebook and Alphabet among others. Freddie Lait, managing partner at Latitude Investment Management, says low bond yields should be a reason to own tech stocks. "As long as bond yields do stay very low tech stocks will not seem overvalued because that's the way the mechanisms of valuing long-term cash flows works," Lait said during CNBC Pro Talks on Wednesday. The relationship between high-growth technology stocks and bond yields has been a big focus for the market after the 10-year Treasury yield spiked above 1.7% in March . This was on the back of more optimistic economic growth prospects in the U.S. and higher inflation expectations. But since then, 10-year Treasury yields have fallen and stood at around 1.288% on Wednesday as investors grew concerned about the strength of the economic recovery given the spread of the coronavirus variants globally. Facebook 'crossed the rubicon' Lait said he owns Alphabet, Visa , Texas Instruments and Facebook among other technology stocks in the funds he manages. The investment manager said he held off from investing in Facebook as a result of social concerns involving the social media platform four to five years ago which "were much harder to defend." He cited issues of misinformation being spread on Facebook as well as the platform being used to interfere in elections around the world. However, Lait said the Facebook story has changed. "I think they've crossed the rubicon in terms of really trying to improve the social good and the social purpose behind the platforms that they have," he said. "And I think to us that was a great hurdle that allowed it to fit into our investable universe." We think Facebook's in a great place for the next few years. managing partner, Latitude Investment Management Freddie Lait The investment manager also addressed the regulatory risks to Facebook and Alphabet, the parent of Google. The U.S. government has stepped up efforts to regulate big tech more stringently this year . Regulators in Europe , Australia and India are also increasing scrutiny on Big Tech. Lait said there is a "real threat that some of these tech businesses are further sort of pressurized from regulatory risk and that's a share price risk." But that might not be the case for Alphabet and Facebook. "Whether the operating performance of the business model, for Alphabet and Facebook … (is) really impacted in the short-term by the regulatory risks on an operating level, we think is actually (a) very low probability." "We think Facebook's in a great place for the next few years." Falling bond yields a boost for tech Low bond yields are generally seen as good for high-growth technology stocks. When bond yields spiked this year , the tech-heavy Nasdaq sold off. Lait said bond yields are "basically (at) all-time lows" and investors should still "see the earnings yield available in equities as highly attractive." Investors may choose to put money into stocks over bonds if their potential return on equities is higher. Low bond yields make stocks more attractive. The investment manager also said low bond yields mean that "you're discounting future cash flows to even lower levels and you can take those longer duration stocks." Discounted cash flow is a method Wall Street uses to figure out what a future stream of cash flow — or earnings — is worth today. But higher interest rates erode the value of growth companies' future profits, compressing their stock valuations. Hence, lower rates are seen as favorable for high-flying technolgoy companies, whose valuations after often predicated on future growth. "So we're very happy investing in some of this, having some exposure and I would highly recommend investors do because a lot of these businesses are building out to the future and have huge duration in their intrinsic value growth prospects," Lait said.

VIDEO6:1506:15

Tech stocks like Facebook are still a buy, says fund manager

PRO Video

Investors should have exposure to high-growth technology stocks, according to one investment manager whose fund owns Facebook and Alphabet among others.