Be wary of buying the dip in tech stocks

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The sell-off in tech shares has provided a window of opportunity for investors, but strategists warn it might be too soon to go bargain hunting.

Strategists urge caution amid expectations of heightened volatility in coming months.While strategists believe the tech rout has thrown up some bargains, particularly among the megacap stocks, some say it’s too early definitively to buy into the weakness.

A Goldman Sachs index of unprofitable US tech stocks, including companies such as Uber, Snap and Peloton, has fallen almost 40 per cent since mid-November, while the Nasdaq 100 has dropped about 15 per cent. “We expect a regime change away from visionary growth to companies that make a profit, can withstand margin erosion and whose capital management is prudently managed so that their balance sheets can withstand any shocks from both equity and credit markets,” Chesler says.Morningstar says it has found a number of undervalued tech stocks in the aftermath of the sell-off, emphasising it is focusing on high-quality companies that have a wide economic moat, or long-term competitive advantages.

“The purpose of these companies is often to enrich the promoters, not the shareholders.” says portfolio manager of WAM’s global fund Nick Healy. “If an investor isn’t confident a business model stacks up, even at a significantly lower price, it doesn’t always mean the company is undervalued.”While the US tech behemoths are more protected from sell-offs than zero profit companies, they are facing growing regulatory pressure.

“There are going to be a lot of investors dumping these stocks because they’re running up steep losses given they were only buying them as a momentum trade.”

 

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