With exposure to 10 disruptive technological themes, the ALPS Disruptive Technologies ETF (CBOE: DTEC) is home to plenty of stocks with the growth label. That doesn’t mean investors should be concerned about valuations.
In fact, some data points suggest growth stocks, including some high-flying DTEC components, may not be as richly valued as some investors think.
“For investors worried that growth stocks’ valuations are approaching extreme levels last seen during the dotcom bubble, Bernstein said they are looking at the wrong place,” reports Yun Li for CNBC. “The Wall Street firm said many investors are focused on tech multiples relative to the broader market and draw comparisons to the 2000s. But due to the different macro environment, this method doesn’t paint an accurate picture of the valuation of the growth sector.”
Better Comps
DTEC tracks the Indxx Disruptive Technologies Index, which identifies companies using disruptive technologies across ten thematic areas, including Healthcare Innovation, Internet of Things, Clean Energy and Smart Grid, Cloud Computing, Data and Analytics, FinTech, Robotics, and Artificial Intelligence, Cybersecurity, 3D Printing, and Mobile Payments.
Investors looking to get a better handle on growth stock valuations should compare those names to slower growth counterparts.
“Instead, Bernstein said investors should look at high-growth stock valuations compared to their low-growth peers, and they are still far from the extremes of 20 years ago,” according to CNBC.
Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Still, data suggest the growth/value premium isn’t overly elevated relative to historical norms. That’s potentially good news for DTEC.
Growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors.
“The tech sector has been the best performer this year by far, lifting the broader market out of the coronavirus-induced slump. Investors flocked to big technology companies as their online businesses proved more resilient amid the lockdown,” reports CNBC.
Other technology funds to consider include the Technology Select Sector SPDR ETF (NYSEArca: XLK) and the Fidelity MSCI Information Technology Index ETF (FTEC).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
