In a letter to investors in his fund, hot-shot hedge fund manager David Einhorn claims "we are witnessing our second tech bubble in 15 years.” To support his case Einhorn cites examples like the rejection of “conventional valuation methods,” short sellers being forced to cover positions and big first-day pops for IPOs.
In the attached clip Mark Luschini of Janney urges investors not to paint the tech market with quite so broad a brush. “The tech sector is about 19% of the S&P 500 (^GSPC) so a lot of companies get rolled up into that space,” Luschini notes, “While I agree that particularly some of the social media companies that were trading at 20, 50, 100 times earnings or sometimes ‘priced to hope’ earnings ratios are indicative of bubble-like characteristics, I can’t say that for the tech industry in the aggregate.”
In terms of recommended courses of action for individual investors, there aren’t many great choices. While parts of the tech space are fairly valued it’s impossible to have a bubble without mass mania. History strongly suggests that when panic buying ends the selling that follows is indiscriminate.
Luschini’s advice for those concerned about the bubble possibly being formed is to focus on older, steadier names and when in doubt get out. “When companies like Facebook (FB) are paying $19 billion for WhatsApp it says something about a storyline that is long on expectations and short on current profitability.”
Ultimately the void between hope and profits needs to be filled. Unfortunately neither David Einhorn nor anyone else knows when exactly that’s going to happen.
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