As always, there are countless pundits blowing the “bubble horn” — warning everybody of an impending collapse on Wall Street. Given the recent losing streak for major equity indexes, “bubble fears” have become more and more prevalent across financial news media outlets.
We’re not going to pretend that we know when the market has in fact topped out, it may very well be happening as we speak; but perhaps more importantly, we’re also not going to blindly accept big, bold article headlines as the truth with regards to what’s next for the market.
Today, we’re taking the time to examine one of the more popular “bubble theories” floating out there — that is, are technology stocks grossly overvalued?
How "Expensive" are Tech Stocks?
Earlier this week, Patrick O’Shaughnessy, seasoned portfolio manager and respected author, took a deep dive into examining the question: how expensive are expensive tech stocks?
He takes a closer look at the earnings yield (operating profit divided by enterprise value) for both tech stocks and the broader equity market dating all the way back to 1980. Judging from the graph compiled by O’Shaughnessy below, we see that tech stocks generally carry about a “25% premium” relative to the broad market’s valuation; furthermore, notice how this premium became seriously inflated during the late 90s/early 00s as the tech bubble reached euphoric levels.
Fast forward to today, and we see that tech stocks, based on the earnings yield valuation metric, are about 20% more expensive than the broader market. When we consider that historically tech stocks have carried a 25% premium, today’s valuation seems quite reasonable — and more importantly, far from bubble territory.
In other words, don’t get caught up in the “tech bubble” fears that are permeating the media outlets.
The Bottom Line
Instead of focusing on overblown bubble fears, you should strive to embrace any correction in the market as an opportunity to scale into high-quality dividend payers. While we’re discussing tech stocks, why not consider adding some to your portfolio, especially ones with a solid dividend-growth track record. If you need a place to start your research, consider the Top 10 Tech Stocks That Pay a Dividend – this piece examines tech stocks that warrant a closer look from income-minded investors of all walks.
Be sure to follow us on Twitter @Dividenddotcom.