After a steep sell-off, internet stocks and related exchange traded funds are beginning to look cheap, with little or no change to their underlying fundamentals.
Citigroup (NYSE: C) analyst Mark May argues that many tech stocks look attractive at current levels after the 20% or more fall from their recent peaks, reports Steven Russolillo for the Wall Street Journal.
“We believe the recent pullback represents a particular opportunity among large cap Internet stocks, with multiples having retraced to levels not seen for more than two years, with no/little change in fundamentals, and with investment profiles that sync well with what portfolio managers are seeking in today’s market,” May said in a research note.
Specifically, May singles out Facebook (Nasdaq: FB), Google (NasdaqGS: GOOG) and Amazone (NasdaqGS: AMZN).
Overall, Citi’s market-weighted large-cap Internet index has declined 18% since a March peak, whereas the S&P 500 broke above 1900 for the first time Tuesday.
“Despite the pullback in valuations, the fundamentals of large cap Internet companies haven’t changed,” May added.
On a valuation stand point, many of these companies are much cheaper but not as cheap by traditional metrics. LinkedIn (NYSE: LNKD) shows a forward price-to-earnings ratio of 54.1, down from 118 in March, whereas the S&P 500 has a P/E of 16.6, according to Morningstar data. Nevertheless, May remains undeterred.
“We believe this pullback not only creates an opportunity but has positioned large cap Internet stocks well relative to the key factors many portfolio managers are seeking in today’s market,” May said.
Investors interested in taking broad approach to the sector can consider a number of tech-related ETFs.
For instance, the Global X Social Media Index ETF (NasdaqGM: SOCL), which tracks social media names like FB at 10.7% of the portfolio, LNKD at 9.5% and GOOG 5.3%, has declined 19.5% year-to-date. [Social Media ETF Struggles to Recapture 2013 Magic]
The First Trust Dow Jones Internet Index Fund (NYSEArca: FDN) and the PowerShares NASDAQ Internet Portfolio (NasdaqGM: PNQI) track more large-cap internet names. FDN holdings include AMZN 6.9%, FB 6.8%, GOOG Class A-shares 5.1%, GOOG 5.1% and LNKD 3.0%. PNQI tracks FB 8.2%, AMZN 7.9%, GOOG Class-A 4.2% and GOOG 4.1%. FDN has declined 7.9% and PNQI has decreased 9.7% year-to-date. [You May Not Want to Sell This ETF in May]
For more information on the tech sector, visit our technology category.
Max Chen contributed to this article.
Tom Lydon’s clients own shares of Amazon, Google and Facebook.