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Tech stocks are crashing. Facebook (Nasdaq:FB) and Twitter (NYSE:TWTR) have plunged around 40% in a collapse that began in December. The fall of these high flying social media stocks is even more dramatic as they were two of the best performing stocks of 2013.
Last year, Facebook doubled in price and Twitter almost tripled in less than two months. After such big gains, it’s clear that these stocks were due for a pullback.
Facebook and Twitter are unique in many ways, but they’re part of a select group of new, high growth Internet stocks that have attracted momentum investors and traders. Along with LinkedIn (Nasdaq: LNKD), SalesForce.com (NYSE: CRM) and Yelp (Nasdaq: YELP), these stocks were the leaders in 2013.
Yet investors recently woke up to the rich valuations of these stocks, and have been taking profits. If you look just at Facebook and Twitter it sure looks like a tech crash.
If you look a little deeper though, it becomes clear that tech in general is not collapsing. The Vanguard Infotech ETF (ARCX: VGT), for example is down only about 3% from its all time high achieved last month. Meanwhile, the Nasdaq Composite index closed is down around 6.3% from its 52-week high. While these losses are meaningful, they are not disastrous.
The decline in red-hot growth stocks in sectors including social media and biotech has dragged down tech stocks, but this is nothing more than an overdue correction in some stocks and sectors that ran too far too fast.
Even after some big losses, it’s clear that this is different than a 2000 style bursting bubble. While it is unlikely that we will see Twitter or Facebook jumping back to their March highs, there are opportunities that come out of this situation.
Established tech companies with proven profit records and dominance in their fields are extremely attractive. These companies include IBM (NYSE: IBM), Microsoft (Nasdaq: MSFT) and Apple (Nasdaq: AAPL).
All 3 have lived through their time as tech darlings when potential growth was overvalued. They are now all mature, cash producing machines with decent dividends and a good chance of beating low growth expectations.
Big Tech Stocks: Safe and Steady
As you can see, both IBM and Microsoft are up over the last month despite some volatility. Meanwhile, Apple shares are down around 1% over the same period.
Given this evidence it is hard to make the case that we are witnessing the same tech stock crash caused by the dotcom bubble bursting. When that happened, everything collapsed together. What we are seeing now is a much more normal and healthy occurrence.
It is not about troubles in any particular sector or sectors. Potential growth has been overvalued and, as select stocks have gotten expensive. The fall of these overpriced growth stocks reflects the changing mood of investors.
Using the simple metric of forward P/E, Apple, IBM, and Microsoft all trade at a discount to the market average. They are far from overvalued. In the coming months, any hint of beating quite conservative earnings estimates will cause them to revert to the mean and cause a significant pop in their stocks.
Some traders may think that now is a time to buy the social media stocks that have dropped 30 – 40 percent. But even at these prices, rapid, exponential growth is priced into these stocks.
A better approach is to buy old, established tech companies such as Apple, IBM, and Microsoft at reduced valuations. Your downside will be limited, and there is significant upside.
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