Growth stocks tend to fly high, but Internet stocks and sector-related exchange traded funds may be trading at dangerously overvalued levels relative to the broader market.
Year-to-date, the PowerShares NASDAQ Internet Portfolio (NasdaqGS: PNQI) gained 8.6% and First Trust Dow Jones Internet Index Fund (NYSEArca: FDN) increased 9.4%. [Investors Rotate Into Growth-Oriented Tech Stocks, ETFs]
David Seaburg of the Cowen Group argues that Internet stocks are now trading at a much higher premium than usual, which suggests that the sector may be overpriced and investors are more at risk, reports Alex Rosenberg for CNBC.
Seaburg points out that while the price-to-earnings ratio of Internet stocks tends to be rich compared to the broader tech sector as a whole, the premium is exceptionally high now.
For instance, PNQI is now trading at a 44.2 price-to-earnings. FDN has a 41.6 P/E. Meanwhile, the Technology Select Sector SPDR (NYSEArca: XLK) showed a 18.3 P/E.
The analyst calculates that the valuation premium for Internet stocks is two standard deviations above its average, which by definition should only occur some 2.5% of the time.
Consequently, Seaburg warns that Internet stocks are now at an “inflection point” where the sub-sector could experience a violent turn.
“The last time it was there, we saw a massive selloff in the space,” Seaburg said on CNBC.