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Tech Stocks Are Cheap, Value Expensive: A Rare Opportunity?
In recent months, we've witnessed a significant rotation in the stock market, with investors gravitating toward defensive, value-oriented stocks as they brace for an economic slowdown and potential shifts in interest rate policy.
This flight to safety has caused many value stocks—traditionally considered stable but slow-growing—to become highly sought after, driving their valuations higher. At the same time, tech stocks, known for their growth potential, have seen their prices drop, creating an unusual dynamic where some of the market’s most innovative companies are now trading at lower relative valuations.
This presents a unique opportunity for investors. While value stocks like Walmart, Procter & Gamble and Coca-Cola have been bid up due to their perceived safety, tech giants like Alphabet and Meta Platforms are now priced very attractively. Despite their lower valuations, these tech companies still have superior growth prospects, making this a rare moment where investors can acquire high-growth stocks at a discount, while more defensive stocks have become relatively expensive.
In this article, we’ll explore how this market dynamic has unfolded and why tech’s current pricing could be an opportunity you don’t want to miss.
Defensive Stocks Have Led the Market
If you have been following my recent write-ups you will know that I have been talking about this rotation for some time now. Below we can see that defensive ETFs such as Value, Healthcare and Utilities have held up better than Tech and the broad market over the last few months.
While it has been a good ride for those that were early in the trend, I am not sure this theme will continue much longer. In the chart above, we can see how stark the comparative valuations are now, with the tech stocks trading lower forward multiples than the value stocks.
However, the narrative has begun to shift and after several months of consolidation, tech stocks appear primed for the next leg higher. In addition to the now attractive valuations, chatter and activity surrounding Artificial Intelligence is picking up again, which should lure investors back to tech. Apple just released its newest AI enabled iPhones and Oracle’s Larry Ellison is talking about building thousands of new data centers. Ellison also said that at a dinner recently with Elon Musk and Nvidia’s Jensen Huang, that he and Elon were begging Jensen for more GPUs.
Comparative Growth Forecasts: Tech vs. Value
When we compare the earnings growth projections for tech to value the disparity is striking. Over the next 3-5 years, tech stocks are expected to deliver far superior earnings growth.
Alphabet: Analysts project GOOGL to achieve 17.5% annual EPS growth over the next few years. This growth is driven by the company’s dominance in digital advertising, its strong position in artificial intelligence (AI) technologies, and its thriving cloud services segment through Google Cloud.
Meta Platforms: META is forecasted to grow its earnings at an even more impressive rate of 19% annually. This growth comes from its continuing dominance in social media advertising, its shift to AI-enhanced tools for advertising and user engagement.
Walmart: On the other hand, retail giant Walmart is expected to grow its EPS at a much more modest rate of 8.2%. While Walmart has invested heavily in e-commerce and technology to adapt to changing consumer habits, it still faces slower growth due to its mature market and tight margins in retail.
Procter & Gamble: A defensive stock like PG, known for its household consumer products, has an EPS growth forecast of 6.6%. While PG offers steady earnings, its growth prospects are limited by its reliance on mature markets and a slower pace of innovation compared to tech.
Coca-Cola: Finally, Coca-Cola’s expected growth rate of 6.3% reflects its role as a staple in the consumer staples sector. KO’s focus on beverages, while lucrative and reliable, doesn’t offer the same explosive growth potential as tech companies operating in rapidly evolving industries like AI and digital media.
Should Investors Buy GOOGL and META Stock?
Growth forecasts clearly favor tech stocks like GOOGL and META. Their earnings are expected to compound at rates more than double that of traditional value stocks like WMT, PG, and KO. This highlights a key point: while value stocks provide stability, their limited growth potential makes them less attractive for investors seeking high returns over the long term. On top of that, tech stocks now offer better relative valuations following the recent rotation into defensive stocks, making them an even more compelling buy.
For example, GOOGL and META, despite their higher growth potential, currently trade at forward P/E multiples lower than their historical averages, as investors have become more cautious on tech. Meanwhile, WMT, PG, and KO, with slower growth prospects, are trading at elevated P/E ratios compared to their historical norms, as investors have flocked to these defensive names amid economic uncertainty.
This unusual dynamic presents a rare opportunity for investors. Buying tech stocks with high growth potential at attractive valuations can offer a combination of both growth and value. On the flip side, while value stocks provide near-term safety, they may be fully priced, with limited upside left if growth fails to materialize.
For investors, the key takeaway is that tech stocks are offering a better balance of growth potential and reasonable valuations, while value stocks, despite their recent popularity, may be nearing their upside potential.
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Today you can access their live picks without cost or obligation.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: Walmart, Procter & Gamble, Coca-Cola, Alphabet Meta, Oracle's and Nvidia's
For Immediate Release
Chicago, IL – September 17, 2024 – Today, Zacks Investment Ideas feature highlights Walmart (WMT - Free Report) , Procter & Gamble (PG - Free Report) and Coca-Cola (KO - Free Report) , Alphabet (GOOGL - Free Report) , Meta Platforms (META - Free Report) , Oracle’s (ORCL - Free Report) and Nvidia’s (NVDA - Free Report) .
Tech Stocks Are Cheap, Value Expensive: A Rare Opportunity?
In recent months, we've witnessed a significant rotation in the stock market, with investors gravitating toward defensive, value-oriented stocks as they brace for an economic slowdown and potential shifts in interest rate policy.
This flight to safety has caused many value stocks—traditionally considered stable but slow-growing—to become highly sought after, driving their valuations higher. At the same time, tech stocks, known for their growth potential, have seen their prices drop, creating an unusual dynamic where some of the market’s most innovative companies are now trading at lower relative valuations.
This presents a unique opportunity for investors. While value stocks like Walmart, Procter & Gamble and Coca-Cola have been bid up due to their perceived safety, tech giants like Alphabet and Meta Platforms are now priced very attractively. Despite their lower valuations, these tech companies still have superior growth prospects, making this a rare moment where investors can acquire high-growth stocks at a discount, while more defensive stocks have become relatively expensive.
In this article, we’ll explore how this market dynamic has unfolded and why tech’s current pricing could be an opportunity you don’t want to miss.
Defensive Stocks Have Led the Market
If you have been following my recent write-ups you will know that I have been talking about this rotation for some time now. Below we can see that defensive ETFs such as Value, Healthcare and Utilities have held up better than Tech and the broad market over the last few months.
While it has been a good ride for those that were early in the trend, I am not sure this theme will continue much longer. In the chart above, we can see how stark the comparative valuations are now, with the tech stocks trading lower forward multiples than the value stocks.
However, the narrative has begun to shift and after several months of consolidation, tech stocks appear primed for the next leg higher. In addition to the now attractive valuations, chatter and activity surrounding Artificial Intelligence is picking up again, which should lure investors back to tech. Apple just released its newest AI enabled iPhones and Oracle’s Larry Ellison is talking about building thousands of new data centers. Ellison also said that at a dinner recently with Elon Musk and Nvidia’s Jensen Huang, that he and Elon were begging Jensen for more GPUs.
Comparative Growth Forecasts: Tech vs. Value
When we compare the earnings growth projections for tech to value the disparity is striking. Over the next 3-5 years, tech stocks are expected to deliver far superior earnings growth.
Should Investors Buy GOOGL and META Stock?
Growth forecasts clearly favor tech stocks like GOOGL and META. Their earnings are expected to compound at rates more than double that of traditional value stocks like WMT, PG, and KO. This highlights a key point: while value stocks provide stability, their limited growth potential makes them less attractive for investors seeking high returns over the long term. On top of that, tech stocks now offer better relative valuations following the recent rotation into defensive stocks, making them an even more compelling buy.
For example, GOOGL and META, despite their higher growth potential, currently trade at forward P/E multiples lower than their historical averages, as investors have become more cautious on tech. Meanwhile, WMT, PG, and KO, with slower growth prospects, are trading at elevated P/E ratios compared to their historical norms, as investors have flocked to these defensive names amid economic uncertainty.
This unusual dynamic presents a rare opportunity for investors. Buying tech stocks with high growth potential at attractive valuations can offer a combination of both growth and value. On the flip side, while value stocks provide near-term safety, they may be fully priced, with limited upside left if growth fails to materialize.
For investors, the key takeaway is that tech stocks are offering a better balance of growth potential and reasonable valuations, while value stocks, despite their recent popularity, may be nearing their upside potential.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.