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Forget Virus Scare, Buy Tech ETFs on the Dip

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Key U.S. indexes lost heavily in the past two days (as of Feb 25, 2020) on the rise in coronavirus cases outside China. Together, Apple AAPL, Facebook (FB - Free Report) , Amazon AMZN, Microsoft MSFT and Google-parent Alphabet GOOGL) lost more than $238 billion on Feb 24.

The S&P 500 information technology sector has fallen 9.3% since Thursday’s close, wider than the 7.3% decline of the broader index. It is to be noted that technology shares held the key to the stupendous market rally of the past few months. Now, growing coronavirus concerns have battered the sector probably on fears that these stocks are overvalued.

Also, renewed global growth fears are hurting this high-growth sector. If this was not enough, Apple has already warned that it might not meet its guidance revenues for the March quarter due to the outbreak as it has considerable exposure to China (read: Coronavirus to Hurt Apple Earnings: Time to Buy These ETFs?).

Should You Buy Tech ETFs on Sale?

Goldman appears bullish on tech stocks. It said that though investor capital has been most concentrated on FAAMG (Facebook, Amazon, Apple, Microsoft and Google-parent Alphabet) in 20 years, events like the dot-com bubble burst are less likely to recur.

Goldman pointed out that the top five tech stocks of the S&P 500 index are way cheaper (trading at a P/E ratio of 30x) now than the top ones of the dot-com bubble time in 2000-2001 (when top five stocks were trading at a P/E of 47X). Notably, the five major stocks of 2000 were Microsoft, Cisco CSCO, General Electric GE, Intel INTC, and ExxonMobil XOM.

“Lower growth expectations, higher reinvestment, and lower valuations” will continue to drive tech stocks in the coming days, per Goldman Sachs. Big Tech companies boast three-year growth investment ratios of 48% compared with the S&P 500's 21%, as pointed out by Goldman Sachs.

Tech companies are cash-rich. As of fourth-quarter 2019, cash, cash equivalents and marketable securities stood at around $452.5 billion. Per an article published on BlackRock, “exceptional profitability has led to exceptional cash-flow generation, much of which is returned to shareholders in the form of buybacks” (read: Microsoft's Azure Returns to Growth: 5 ETFs to Buy).

From the price/cash flow (P/CF) angle, the tech sector is cheaper than the S&P 500. Investors should also note that the P/CF ratio of the computer and technology market now stands at 13.83x against the S&P 500 Composite Market ETF’s P/CF of 17.9x.

There are more reasons to be enthusiastic about the sector. In the dotcom bubble era, the tech sector’s P/CF was 31.60x versus 13.83x at the current level. In 2001 and 2002, the bubble burst, leading to a bear market for equities. But then also, the tech sector’s P/CF was higher than what it is now.

Per the Earnings Trends issued on Feb 19, about 93.5% of the technology sector of the S&P 500 reported earnings. Bottom line rose 6.3% on 5.8% higher revenues. About 84.7% beating EPS estimates and an 88.1% beating revenue estimates.

Against this backdrop, we highlight a few tech ETFs that could be bought on sale.

Technology Select Sector SPDR ETF (XLK - Free Report) : Zacks Rank #1 (Strong Buy)

iShares Expanded Tech-Software Sector ETF (IGV - Free Report) : Zacks Rank #1

Vanguard Information Technology ETF (VGT - Free Report) : Zacks Rank #1

Fidelity MSCI Information Technology Index ETF (FTEC - Free Report) : Zacks Rank #1

iShares U.S. Technology ETF (IYW - Free Report) : Zacks Rank #1

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