Until recently, I could not justify adding any tech stocks to our portfolio. It’s not that I didn’t believe in the long-term growth prospects of those businesses, but I found their valuations far too high. That is no longer the case, suggests Jim Pearce, editor of Investing Daily's Personal Finance.
Tech stocks have taken a beating this year as the Fed aggressively raises interest rates to stave off inflation. The latest rate hike by the Fed should have come as no surprise to anyone on Wall Street.
As Fed Chair Jerome Powell bluntly stated, “My colleagues and I are strongly committed to bringing inflation back down to our 2% goal.” To accomplish that objective, the Fed is driving up interest rates to suppress consumer demand. Higher interest rates mean higher borrowing costs to purchase homes, cars, and other big-ticket items.
Most companies use debt to finance growth so their borrowing costs will go up, too. In turn, they pass those higher borrowing costs onto consumers by raising prices. It’s a vicious cycle that Powell estimates will not be over until sometime in 2024.
The surge in inflation and a commensurate rise in interest rates has been particularly hard on tech stocks. Since inflation began spiking a year ago, the tech-heavy NASDAQ Composite Index has lost nearly a third of its value.
However, now that tech stocks are so cheap, I’m beginning to wonder at what point they may become oversold and ripe for a rebound. After all, technology never goes out of fashion. Inflation comes and goes, but technology will be with us forever.
A year ago, I excoriated mutual fund manager Cathie Wood for being smug and self-serving in her adoration for tech stocks. I noted that her ARK Innovation ETF (ARKK) is “defiantly undiversified.” I also observed that rising interest rates “present a valuation problem for all of the ARK funds.”
Since then, ARKK has gotten clobbered by the stock market. After peaking above $125 last November, ARKK is now trading below $40. That’s a 70% loss in just 10 months, which is more than double the decline in the NASDAQ Composite Index over the same span. Even worse, ARKK is worth no more now than it was five years ago.
To my contrarian way of thinking, I can’t help but wonder if ARKK is now worth buying. The same high-octane stocks that gutted its performance this year could send it rocketing higher next year. The fund’s top holding is Tesla (TSLA), which comprises nearly 11% of the fund’s assets. Zoom Video Communications (ZM) is the second-largest holding at 8% of assets.
To be sure, both of those stocks became grossly overvalued during the stock market’s unlikely surge in the wake of the coronavirus pandemic. But now that they are trading at more reasonable valuations, they may be worth owning.
The same is true for ARKK’s other holdings, most of which are leaders in their respective industries. Within the fund’s top 10 holdings you will find companies involved in blockchain, gene editing, and renewable energy.
