Investors have been fleeing Big Tech for 'old economy' stocks. Here’s what it means for our holdings

Published Fri, Nov 11 202211:19 AM ESTUpdated Fri, Nov 11 20221:25 PM EST

The world's biggest technology companies, once the darlings of Wall Street, have lost roughly $3 trillion combined in market capitalization over the past year. Remarkably, that's after the tech-heavy Nasdaq composite surged more than 7% in Thursday's biggest market surge in two years on a cooler-than-expected, but still high, consumer price index. Many investors, facing an economic slowdown, persistent inflation, and rising interest rates, have ditched Big Tech this year for more traditional sectors like energy and consumer staples that deliver tangible goods, make a profit and return extra cash to shareholders. Thursday's rally certainly put a dent in the Nasdaq's past 12 months of losses, but the index is still down roughly 29% since last November when it made its last record high. It's a much steeper 12-month drop for the S & P 500 and the Dow Jones Industrial Average , which have fallen 15% and roughly 6.5%, respectively. It's too soon to tell whether Thursday's advances will be the beginning or the end of the bear market or just another head fake. But we do know that this earnings season has been devastating for most of the Club's tech holdings. The largely abysmal results for the last quarter led Jim Cramer to urge investors to limit their exposure to tech and semiconductor stocks . "Tech has been miserable. We said we would do some trimming, but we aren't going to be aggressive," He said recently. Jim had also been calling for Big Tech to cut their costs and reduce headcount. We've seen that start happening recently, with layoffs at Meta Platforms (META) and a hiring freeze at Amazon (AMZN). So what does the past year mean for these mega cap growth stocks that have dominated the market for so long? The market cap of the Club's five Big Tech stocks are collectively down 42% over the last 12 months, as of Thursday's close, according to FactSet. Alphabet (GOOGL) shed 37.32%, giving it a current market cap of $1.13 trillion, compared with $1.81 trillion last year. Apple's (AAPL) market cap has come down 3.73%, to $2.33 trillion, compared to $2.43 trillion a year prior. Meta Platforms (META) lost 67.55%, at $251.55 billion, compared with a market cap of $775.28 billion last year. Microsoft's (MSFT) market cap fell 27.07%, to $1.81 trillion, from $2.48 trillion a year ago. Amazon (AMZN) lost 44.18%, leaving it with a market cap of $985.78 billion, compared with $1.76 trillion last year. However, market cap alone doesn't tell investors whether they're getting a good value at these current beaten down levels. To get a more holistic picture, it's important to review each tech stock on a forward price-to-earnings-based valuation, or the P/E ratio, which is calculated by taking the price of a stock and dividing it by the next 12 months earnings-per-share estimates. Comparing the current multiple to a stock's 5-year historical average provides perspective on whether it's cheap or expensive. Our comparisons show that their current valuations are either lower, or in line with, their averages over the past five years. Here's a closer look at each of our tech stock's valuation changes, along with our analysis, too. Alphabet (GOOGL) Alphabet's stock currently trades at 18 times forward earnings estimates, well below its 5-year historical average valuation of 24.6 times forward earnings. This cheaper valuation has been driven by recession fears and related advertising budgets cuts. The Club's take: We continue to believe the Google parent is the best company to get a return on your investment for advertising. Not to mention, Google's search engine is the one-stop-shop for questions, making it the preferred destination for advertisers. What's more, its Google Cloud business continues to grow at a rapid pace. And most importantly, the company has strong free cash flow. Considering these factors, investors with a long-term time horizon who believe the current macroeconomic challenges will eventually subside, may find Alphabet shares at current levels attractive, a cheaper valuation than where the stock usually trades. Alphabet closed up Thursday more than 7%, at $93.94 a share. Apple (AAPL) Apple's stock is currently trading at 23.3 times forward earnings estimates, slightly higher than its 5-year average of 21.4 times. This shows investors could have gotten this valuation at almost any point over the last 5 years. The Club's take: As of Thursday, there is arguably added risk for Apple because of China's strict zero-Covid policy, though on Friday there was another sign those restrictions may be starting to ease more. Being close to its 5-year average valuation doesn't make it the most enticing P/E compared to other tech stocks whose valuations have dropped more than their historical averages. If a recession is on the horizon, Apple would likely not be the first place to park your money. But we maintain our "own it, don't trade it" stance. Apple closed up nearly 9% Thursday, at $146.87 a share. Amazon (AMZN) Shares of Amazon are trading at 61.7 times forward earnings estimates, well below the 76.3 times historical 5-year average. But while Amazon stock is cheap against itself, its expensive compared to the overall market. The Club's take: Amazon has historically had a high valuation and is the most expensive of the tech bunch. With the recent carnage in mega cap tech, the stock has gotten cheaper but has not dropped to attractive levels when compared to Alphabet's valuation drop, for example. However, there are many factors that can make the stock go higher in the future. For example, the company's deal with the National Football League to air games on Amazon Prime will likely bring in a lot of new members, its Amazon Web Services business is a market leader in the cloud, and management is moving to more aggressively cut costs. Amazon closed up Thursday more than 12%, at $96.63 a share. Meta Platforms (META) Meta currently trades at 13.6 times forward earnings estimates, compared with the 5-year average of 21.8 times. Investors were disappointed when Meta announced it would increase spending on its metaverse investments during its fiscal third quarter earnings. The Club's take: While Meta currently trades at a large discount, we think management's commitment to spending billions on the metaverse could hamper growth. Given the challenging macroeconomic backdrop, we don't think it's a prudent time for Meta to continue pouring cash into Reality Labs, the virtual- and augmented-reality headset unit that's lost $9.4 billion so far this year . We see the company's recent move to lay off more than 11,000 employees as difficult yet necessary to control costs following the company's dismal third-quarter performance and weak forward guidance. While the company's fundamentals are resilient, we remain cautious on the stock. Meta closed up Thursday more than 10%, at $111.87 a share. Microsoft (MSFT) Microsoft is trading at a discount of 24 times earnings compared to its 5-year historical average of 27.3 times, but still more expensive than the broader market as measured by the S & P 500's forward multiple of a little more than 17 times. Microsoft has come under pressure due to weakening demand for personal computers, the strong U.S. dollar and tightening enterprise budgets for the cloud. The Club's take: Microsoft's lower valuation compared to its historical average looks appealing, however, growth from here will be harder to come by in this tough economic climate. Moreover, the valuation isn't as attractive once we account for growth expectations. The growth adjusted valuation, as indicated by the stock's current price/earnings-to-growth (PEG) ratio of 2.2, stands just about equal to the 5-year historical average of 2.1. This means, when factoring in growth rates, the stock doesn't appear as cheap as the P/E ratio seemingly indicates. Overall, we think Microsoft has long-term potential, nevertheless, we would consider trimming on the bounce today, if we weren't restricted, given the near-term headwinds the company must overcome. Microsoft closed up Thursday more than 8%, at $242.98 a share. Bottom line We don't intend to make a specific call on the future of mega-cap tech, but rather aim to highlight how a vicious bear market and economic slowdown has wiped out collectively trillions of dollars in market capitalization from just a handful of companies — the same ones that led the market higher in the previous bull market. There has been a school of thought that the market can't sustain a rally without mega-cap tech, given the large percentage weightings those companies have in the S & P 500. However, what we have seen throughout third-quarter earnings season is that the broader market can still go higher without this once loved group. This shows that a lot of sector rotation is happening underneath the major averages, out of technology and into the so-called old economy stocks like industrials and healthcare, to name a few. Does this mean the leadership baton has been passed? It's still far too soon to tell, but we'll be monitoring the situation in the weeks and months ahead. — CNBC Investing Club's Jeff Marks and Zev Fima contributed to this report. (Jim Cramer's Charitable Trust is long GOOGL, AAPL, AMZN, META, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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