Apple and the Rest of the Big Tech Stocks Might Be Ready to Rally. Here’s Why. – Barron’s

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Big tech has been downright disappointing this year for investors used to big gains from their stocks. They might also be worth buying right now. The reason: They offer strong growth prospects at reasonable prices.

The FAANGM group Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), Alphabet (GOOGL), and Microsoft (MSFT) isnt very expensive right now. The median forward earnings multiple is just under 30 times, according to FactSet data, above the S&P 500s average multiple of 21.5, but the group has traded at a far higher premium to the S&P 500 in the past. Considering the pace at which AAPL/AMZN/NFLX/GOOGL and MSFT are growing earnings and the long-term prospects for these companies, valuations are reasonable, writes Tom Essaye, founder of Sevens Report Research. These names could be considered GARP, which stands for Growth At Reasonable Price, says Essaye, who favors these stocks over the less profitable, smaller capitalization names.

Reasonable valuations mean earnings growth can take the older tech names higher. Expected earnings growth for 2022 in the FAANGM group, which the market will be pricing in by the end of the year, can provide at least acceptable returns. Facebooks earnings, for example, are expected to grow 17%, while Amazons are expected at 30%. That compares to just 12% for the S&P 500.

Does that mean the value rally will fizzle out? No, just that investors who dont want to put all their eggs in one basket can find opportunity in big tech. Value stocks, which dont have the same secular growth prospects but are sensitive to changes in the economy, have had a strong run. The Vanguard S&P 500 Value Index Fund ETF (VOOV) has outpaced the broader index by about 8 percentage points since the end of September, the start of a larger rally in economically-sensitive assets. As the economy keeps rebounding, value stocks could continue their run, but FAANGM stocks could act as protection against that outcome. And even if value keeps outperforming, FAANGM could still keep pace, Essaye notes.

And that should be good enough.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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Apple and the Rest of the Big Tech Stocks Might Be Ready to Rally. Here's Why. - Barron's