High flying social media stocks have fallen dramatically, after being among the best performing stocks of 2013; recently, investors have woken up to the rich valuations of these stocks, and have been taking profits, observes Martin Tillier in Daily Profit.
While the decline in red-hot growth stocks in sectors such as social media has dragged down tech stocks, this is nothing more than an overdue correction in some stocks that ran too far too fast.
At the same time, 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 (IBM), Microsoft (MSFT) and Apple (AAPL).
All three 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.
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 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 to 40%. 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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