There is An Alternative to Crazy Expensive Tech Stocks, We Just Need to Remove the Kaleidoscope Glasses
To say the market is bubblelicious is a bit of an understatement given that retail “investment” in call options and penny stocks is quite literally off the charts, dwarfing numbers we saw in 1998-2000. We’ve hit on those worries like a broken record here and here so no need to rehash the argument. What strikes us today is the high price investors/speculators/whoever are willing to pay for “growth”. We suspect price or value isn’t much of a concern these days given the absurdity of dollar flow chasing “high growth” names. It is, after all, a greater fool’s game at the moment. There is no actual intention to hold the “stonks” for the long term, but only to sell them at a higher price to a greater fool who comes into the bubble at a later stage.
For long-term investors though, the calculus just doesn’t add up. Actually, “calculus” is too strong a word. What were talking about here is 5th grade math.
Let’s take the Nasdaq 100 as an example, since it is the stock index with the largest number of “growth” names as constituents. The forward price to earnings multiple on the Nasdaq 100 is currently 30 times. It’s quite clearly above any forward multiple as far back as the data go. The average forward PE over the last 15 years is 19 times. Meanwhile, long-term growth estimates call for 13% EPS growth annually whereas the average over the last 15 years is 15% annually. Already, we can see that the market is applying about a 50% premium for a below average level of growth for Nasdaq 100 companies.
So far so good. Here is where the hard core 5th grade math comes in. Let’s assume forward multiples trend toward the long-term average over the next 5 years and growth comes in right as forecast at 13% per annum. I know, I know. Some of you are yelling at me silently because…rates. There is no alternative, and all that, so valuations will stay elevated forever and ever, amen. I’m sympathetic the argument, but a simple study of longer term valuation trends shows they are mean reverting, eventually. But, I digress. Let’s get back to the 5th grade math.