Spec-Tech Crash Is a Good Thing

Today, I hope to explain how the crash of the speculative tech names is a positive.

Last month, we noted that “High-Flying Tech Stocks Were Coming Back to Earth.” Some of the companies we reviewed then included Twitter Inc., LinkedIn Corp., Netflix Inc., Tesla Motors Inc., Priceline Group Inc., Google Inc. and Facebook Inc. Since then, shares of these companies have fallen even further.

Have a look at how much these high fliers have declined from their recent all-time highs (all returns are as of yesterday’s close).


Source: Ritholtz Wealth Management
Source: Ritholtz Wealth Management

To borrow from Martha Stewart, This is a good thing.

To anyone concerned about a speculative tech bubble, as some seem to be, then letting the air out of that bubble should be a positive, right? A reduction of euphoria reflects a return to reason.

Let’s take this exercise a step further, and cherry-pick the hot and not so hot names from 2013.

Take a look at the next chart. The stocks on the green half are those of conservative health-care and consumer-staple companies. They are doing well this year, but they underperformed in 2013.

The other half is last year’s all stars.

The average return of the conservative boring green companies in 2013 was 22 percent, a gain equal to about two-thirds of the stock market’s rise. But this year’s losers were monsters last year, with an average a return of 174 percent.


Source: Ritholtz Wealth Management
Source: Ritholtz Wealth Management

What conclusion can you draw from this? Hot money is becoming downright respectable (or at least is trying to). Markets are going through a rebalancing, with money leaving the high-flying stocks with stretched valuations and finding a home in shares of companies with higher dividends and more reasonable price-earnings ratios.

This is something to embrace, not reject.


Originally published here

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