Alastair Pike / AFP via Getty Images
The
hit a new high on Tuesday—and it’s all thanks to a resurgence in tech stocks like
and
Don’t be surprised if the gains continue.
After going nowhere for much of 2021, big tech is back in favor. During the past month, Facebook (ticker: FB),
(AAPL),
(NFLX)
(MSFT), Amazon.com (AMZN), and
(GOOGL)—the so-called FANMAG group—have gained an average of 4.5%. That beats the
1.4% gain in the same span and is slightly more than the Nasdaq’s 4.4% gain.
This could be the beginning of the gains for the group, if for no other reason than it now looks relatively inexpensive. The average forward price-to-earnings ratio for the group is currently 29.9 times, according to Barclays data. That’s just a tick above the roughly 28 times seen in December 2019, before the pandemic began, but down from a peak of 40 times during the middle of last year.
In fact, the FANMAG stocks may be even bigger bargains than they were in December 2019. That’s because stocks are generally priced off a risk-free rate, in most cases the yield on Treasuries. The lower the bond yield, the more stocks are generally worth, all else being equal. But that hasn’t been the case recently. The 10-year yield currently sits at about 1.47%, down from 1.8% in December 2019. Yet despite lower bond yields, FANMAG earnings multiples remain near their 2019 levels, suggesting the valuations are relatively inexpensive. Barclays strategist Maneesh Deshpande calls the group of stocks cheap and upgraded it to Overweight on Tuesday.
Those reasonable valuations mean the stocks can keep rising as long as their profits keep on growing. And they most likely will. Average earnings per share for these companies are expected to grow by 9% in 2022, according to Barclays, and by 14% in 2023.
Some on Wall Street see bond yields rising, which could put further pressure on the valuations of tech companies. But the FANMAG valuations may already be reflecting investor caution. “A lot of these growth names—their valuations have already moderated,” says Stephanie Lang, chief investment officer at Homrich Berg.
All that suggests more gains may lie ahead for Big Tech—and the Nasdaq.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
