Intel, Oracle, Microsoft and Cisco, known as the four horsemen
during the late 1990s technology boom due to their strong
performance and leading market share, have all rallied since the
beginning of March even as stocks of many other tech companies have
These legacy names have emerged as an alternative for those who want
exposure to the tech sector but are spooked by the slump in
high-growth stocks like Netflix.
These older names have recently attracted more attention because
their growth outpaces the broader market but they don't have the
high valuations of the recent momentum favorites.
"They have high cash levels, nice profit margins, and when the
economy returns, their cyclicality will be a positive," said Robert
Stimpson, portfolio manager at Oak Associates Ltd in Akron, Ohio.
"That they're trading at a discount makes them something of a
defensive play," he added. "I'd rather own them than something like
utilities, which pay a dividend but offer little or no growth."
GO WITH THE FLOW
The change in sentiment can be seen in fund flow figures. The First
Trust Dow Jones Internet ETF has seen outflows of $43.86 million
since the beginning of March, while the First Trust Nasdaq 100
Technology fund — which counts Facebook as a holding but holds few
other "momentum" names — has seen inflows of $9.4 million over that
same period, according to data from ETF.com.
While the likes of Netflix and TripAdvisor have lost more than 20
percent of their market value, putting them in bear market
territory, Dow components Intel Corp and Cisco Systems are up 5.7
percent and 3 percent, respectively, since the beginning of March.
Microsoft Corp is up 2.3 percent over that time and is trading near
its highest levels since the dot-com bubble.
These stocks are considered undervalued by various measures,
including StarMine's measurement of intrinsic value, which looks at
anticipated growth over the next decade. Many of the high-flyers
still look pricey, meanwhile.
Both Netflix and Facebook would still be above StarMine's intrinsic
value measure even if their shares fell another 50 percent from
current levels. However, IBM is almost 40 percent under its
intrinsic value, based on its Friday closing price, while Microsoft
and Oracle are more than 20 percent under.
Another class of shares walloped in the recent selloff are "cloud"
or Internet-software plays.
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Human resources software provider Workday has given up 25 percent of
its value over the past month. The selloff has been more brutal on
its peers: since mid-February, accounting services provider Netsuite
has fallen close to 30 percent, while analytics firms Splunk Inc and
Tableau Software Inc have both shed close to 40 percent of their
"We've seen a very vicious correction in March and April and it
doesn't look like it's over yet," Wedbush analyst Steve Koenig said.
"The selloff was fueled by initially by profit-taking and then it
became a momentum trade to the downside."
"The fact that the multiples had expanded so much just created the
conditions for that trade to happen."
Valuations still look stretched. Workday, which has not reported a
profit since it went public in 2012, is trading at close to 30 times
sales. That compares to roughly 23 times for Splunk and 15 times for
Netsuite. Salesforce.com Inc, in comparison, has a price-to-sales
ratio of 8.2.
Still, many analysts say the case for cloud software companies
remains on solid footing. A report released this month by research
firm IHS estimated that cloud-related spending will balloon to $235
billion by 2017 — up 35 percent from the $174 billion projected for
Straddling the line between growth and value is Apple Inc, Wall
Street's most valuable company. While the stock is trading well
under its intrinsic value, it is well below record levels hit in
2012, suggesting investors remain skeptical that its shares have the
ability to recover. The stock has slipped 1.3 percent since the
start of March, underperforming other legacy names but far better
than the Nasdaq's 7.2 percent drop over the period.
Mark Yusko, chief investment officer of Morgan Creek Capital
Management in Chapel Hill, North Carolina, said Apple was an "in-betweener"
"It has growth, but not as much growth as other tech names, while
also not trading at the multiples of others," said Yusko, who
oversees about $4 billion in assets and whose firm owns Apple. "It
has the best of both worlds, and also the worst of both."
(Additional reporting by Gerry Shih in
San Francisco; editing by Jan
Paschal and Leslie Adler)
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