Tech stocks aren't in a bubble, but investors should be pickier, Credit Suisse says
- Credit Suisse on Thursday trimmed its overweight rating for tech stocks, recommending investors be more selective with their sector picks.
- Crowding in tech giants and the stocks' high-flying valuations sparked some concerns of a dot-com-era bubble forming in the market.
- "Excess in tech is high" but not extreme, the bank's analysts said, adding that metrics ranging from sales to investment as a share of GDP to positioning suggest the sector has room to run.
- Credit Suisse touted gaming and semiconductor stocks as strong picks within the winning sector.
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Tech stocks remain a top pick for Credit Suisse analysts, but the bank advised clients on Thursday to invest in the sector with increased caution.
Crowding in tech mega-caps and shares' stretched valuations led several analysts to raise concerns of a dot-com-era bubble forming in the market. The group's decline in early September relieved some overvaluation fears, but still lofty prices led Credit Suisse to analyze whether investors should steer clear or stay invested.
To start, the bank's analysts looked to several metrics to determine the extent of tech-stock indulgence. Tech investment as a share of gross domestic product sits near its average levels, as does the share of nonresidential investment in tech. The capital-expenditures-to-sales ratio in tech is also far from extended levels and likely boosted by anticipated demand for 5G devices and autonomous-driving upgrades.
From a valuation standpoint, tech stocks are "only modestly expensive" when judging by free-cash-flow yield compared with the broader market, Credit Suisse said. Demand for tech sends a similar signal, with sales in line with their historical trend as opposed to the dot-com bubble's 12% overshoot.
Finally, positioning shows speculation is high in some corners of the sector but not extreme, according to the team. Credit Suisse determined that "excess in tech is high" but not yet at levels of overenthusiasm seen in the late 1990s.
Still, the firm recommended taking some money off the table. The analysts trimmed the size of their overweight rating for tech shares, citing elevated market concentration and higher regulatory risks in the event of a Biden administration. The arrival of an effective coronavirus vaccine could also spark a "short-term reversal in some of the online trends" that lifted tech through the pandemic, the team added.
Investors keeping cash parked in the sector should simply be more selective to keep risk in check, the bank said. Credit Suisse's analysts maintained overweight ratings on semiconductor stocks including TSMC and ASML. Gaming stocks such as Activision Blizzard and Frontier Developments offer strong opportunities at relatively cheap prices, they said.
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