Op-ed: Tech correction was a worthwhile test for the market, which now looks more reasonably valued
On the morning of Sept. 3, the market began to fall, led on the descent by the same technology stocks that had captained the gravity-defying charge upward since late March. Despite being bullish for months, my partners and I appraised the August surge more as a feeding frenzy than the thoughtful recalibration of improving valuations. We had begun the process of trimming positions in stocks that had far surpassed our wildest dreams during a pandemic and global recession.
I attributed my personal case of hyperventilation to a fearsome combination of three factors: the S&P index had touched a 10% gain for the year; its largest five components comprised 27% of the total market value; and a group of stocks, such as Tesla, Zoom, Peloton, and Shopify, all COVID-helped names, had gone vertical.
Below is some data on five stocks that have epitomized the August rally:
Table of Market Enthusiasm
| Company / Price | % Δ from 3/23 - 9/2 | % Δ from 9/2 - 9/14 | Forward P/E |
|---|---|---|---|
| Apple / $114 | 134.3% | -12.7% | 29 |
| Shopify / $399 | 186.3% | -12.3% | 180 |
| Tesla / $401 | 415% | -9.1% | 141 |
| Zoom Video / $400 | 165.5% | -5.3% | 149 |
| Peloton / $80 | 290.1% | -11.6% | 222 |
| SPX / 3,398 | 57% | -5.2% | 19.4 (Using $175 per share for S&P 500 EPS in 2021) |
Each of these, including Apple, has fallen since Sept. 2 . What's the potential downside? Beyond writing "more" it's impossible to calculate buyers' lasting affection for "red hot" stocks, once the coals begin to cool. In the case of Apple, the stock moved from very oversold and 14 times 2021 forecast earnings in late March, to a euphoric 34 times on September 2nd.
Forward earnings estimates, which have been trending up, could reach $175 per share for the S&P 500 in 2021, slightly higher than 2019 profits. In such a low interest rate environment, a multiple of 19 seems reasonable, suggesting a 3325 S&P, close to where we are now.
Arguably, Apple should trade at whatever premium to the market investors collectively agree reflects its future cash flows from its suite of services and products. If S&P earnings grow at 8% long term, and Apple at 12%, that implies a 28.5 multiple, just about where we are today. SHOP, TSLA, ZOOM and PTON can trade wherever buyer sentiment moves them, but emotional investing, with limited valuation support, can be a dangerous game.
Coming out of the pandemic, even with setbacks, is better for the economy and the market than going into it. We are getting closer to vaccines and rapid testing that will allow us to know whether we are infected and infectious, two of the elements that can bring us back from purgatory.
However, recognition of "nose-bleed territory" is a worthwhile check, even if it intrudes on our unbridled enthusiasm for our most loved stocks.
Karen Firestone is Chairman, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.