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The frenzied run for stocks in recent months, and the even loftier heights for tech names in particular, has some market observers uneasily remembering the dot-com bubble that burst in 2000.
But that’s a faulty comparison, according to a recent analysis from Goldman Sachs, which maintains an overweight rating on the sector, implying that investors should continue to buy assets associated within the buzzy tech group.
Information technology stocks have rallied 47.8% in the past 12 months, according to FactSet data. But that “still pales in comparison to the Tech Bubble.” Over the past five years, the sector has returned 149%; between 1995 and 1999, the sector returned nearly 700%. Meanwhile, the tech group’s forward price/earnings ratio trades at a 22% premium to the S&P 500 now, on a relative basis, the analysts wrote, below the long-term average of 31%.
Goldman also makes the case that one key differentiating factor between this run-up for tech and the five-year stretch from the late 1990s to early 2000s is the underperformance endured by information tech names in the five-year phase after the financial crisis.
See: Tesla’s biggest bull stampedes to a $7,000 price target
Goldman also debunks a popular notion: that the recent tech rally has been concentrated in just a few companies. The top five information tech stocks account for 12% of the trailing 3-month return, a ratio that’s lower than at earlier periods of extremes, including not just 2001, but 2012, 1996, and 1991.
For those reasons, Goldman is advising its clients to increase its tech holdings, which may run against conventional wisdom, given the seemingly unrelenting rally in the sector. Goldman recommends “exposure to either a further cyclical rebound (tech hardware and semiconductor shares) or a modest economic growth environment (software and services.).” Info tech also boasts better fundamentals for stock investors, the analysts say (see attached table):
| Expected sales growth, 2020 | Expected EPS growth, 2020 | Margins | |
| Info Tech Sector | 9% | 10% | 22% |
| S&P 500 | 6% | 7% | 11% |
| Source: Goldman Sachs analysis | |||
The Goldman team prefers companies in the subcategory of software and services, and offers 16 names within that category that it says offer “high and stable sales growth, high [return on equity], and trade at reasonable valuations.” Check out the attached list:
| Stock | Ticker | Expected 2020 growth |
| Adobe Inc. | ADBE, +0.72% | 6% |
| Dropbox, Inc. | DBX, +2.13% | 5% |
| Mastercard, Inc. | MA, +0.28% | 75 |
| Genpact Limited | G, -0.76% | 5% |
| Booz Allen Hamilton Holding Corp. (a global information tech consulting firm) | BAH, +0.06% | 4% |
| Visa Inc. | V, +1.18% | 6% |
| Paychex, Inc. | PAYX, +0.31% | 4% |
| Microsoft Corp. | MSFT, +1.56% | 10% |
| Intuit Inc. | INTU, +0.65% | 9% |
| Monolithic Power Systems. Inc. | MPWR, +0.30% | 6% |
| QUALCOMM, Inc. | QCOM, -0.15% | 11% |
| Advanced Micro Devices, Inc. | AMD, +4.49% | 26% |
| Teradyne, Inc. | TER, +0.94% | 13% |
| Maxim Integrated Products, Inc. | MXIM, -0.20% | 9% |
| Lam Research Corp. | LRCX, -0.09% | 25% |
| KLA Corp. | KLAC, +1.13% | 12% |
| Source: Goldman Sachs analysis | ||
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