Although it has outperformed the larger Nasdaq-100 index, which is still down 30 percent over the same period, our theme of Value Tech Stocks, which is made up of technology stocks with a market cap of over $5 billion and a price-to-earnings multiple of under 20x ZRX, has declined by almost 24 percent year-to-date. The Federal Reserve has begun raising interest rates more quickly as a result of the rising inflation. It increased its benchmark interest rates by 0.75 percent in June, the most since 1994, and additional increases of a similar magnitude seem likely in the months to come.
Separately, demand tailwinds related to COVID-19, such as remote working and remote learning, are lessening for technology companies. Due to investors’ desire for a higher margin of safety in the form of higher cash flows and earnings yields, value technology stocks are faring much better than unprofitable high-growth high multiple tech stocks.
So how does the theme’s future look? Even though the near-term outlook is still uncertain due to the tighter monetary environment and worries about a U.S. recession, we still believe that the theme is a good play on long-term trends like the economy’s continued digitization following Covid-19 and increased corporate IT spending.
Additionally, a lot of the theme’s names are successful, established tech companies that are market leaders in their respective industries, which may offer some protection in the current climate. With a market cap of about $440 billion, Facebook parent company Meta is the most valuable company in our theme.
The stock, however, has fallen roughly 53% so far this year. One of the companies in our theme that is expanding the fastest is Skyworks Solutions SWKS, whose revenue increased by about 52% in the previous year. With a price-to-earnings ratio under 7x, Dell is among the stocks in our theme that are most fairly valued. For a complete list of our 36 value technology picks, visit our theme on Value Tech Stocks.
What if you’re looking for a portfolio that is more evenly distributed? Since the end of 2016, our multi-strategy portfolio and high-quality portfolio have consistently outperformed the market.
