Fundstrat’s Tom Lee.
Investors should buy mega-cap tech stocks as the valuation of the Nasdaq 100 plunges to the depths of the dot-com bust.
That’s according to Fundstrat’s Tom Lee, who is leaning bullish on stocks into the second half of 2022.
“The risk/reward in FAANG is attractive. Even anecdotally, the bad news seems priced in,” he said.
Investors should buy mega-cap tech stocks as valuations in the Nasdaq 100 fall to levels not seen since the depths of the dot-com bust, Fundstrat’s Tom Lee said in a Friday note.
That’s a bold call considering that the Nasdaq has seen the bulk of this year’s stock market sell-off, with the tech-heavy index falling nearly 30% at its lows. Rising interest rates and concerns of an economic recession have weighed on the valuations of companies that sport fast growth but little profits.
But after the year-to-date decline, Lee now sees an attractive risk/reward profile in the Nasdaq 100 and its associated mega-cap tech stocks, according to the note.
“Many investors say they are waiting for stocks to crash to absolute rock bottom levels before considering equities. The Nasdaq 100 is already there,” he said.
In fact, the Nasdaq’s price-to-earnings ratio today is lower now than it was at the depths of its dot-com unwind, when the Nasdaq 100 declined by nearly 80% from its 2000 peak, he added.
“Nasdaq 100 is cheaper today than at the absolute 70-year low of 2003. Yup, markets crashed worse than dot-com,” Lee said.
This dynamic means tech stocks are likely to stage a considerable bounce before the rest of the market does, according to the note, and the Nasdaq’s recent relative outperformance relative to the S&P 500 over the past week corroborates that view.
“If anything, this should affirm why the risk/reward in FAANG is attractive. Even anecdotally, the bad news seems priced in,” Lee said, pointing to Microsoft’s stock trading higher after it gave an earnings warning on Thursday due to currency headwinds.
Additionally, Meta Platforms staged a significant bounce on Thursday after it announced what could be considered bad news in that its COO, Sheryl Sandberg, was stepping down from the company.
This “bad news is priced in” environment will be tested once again on Friday after Tesla’s Elon Musk said he has a bad feeling about the economy and wants to cut 10% of the company’s work force. If Tesla stock ends Friday higher, it would once again back up Lee’s outlook that all the bad news is already priced into the markets.
With Lee leaning bullish into the second half of the year, investors should consider buying tech stocks that trade at considerably depressed valuations, according to the note. He highlighted Meta, Alphabet and Netflix as examples of mega-cap tech stocks that are trading at discounts relative to the S&P 500.
“FAANG and Nasdaq are outright attractive on a valuation basis,” Lee concluded.
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