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Lee Munson: ‘I do think we are in a tech bubble'

Portfolio Wealth Advisors president and CIO Lee Munson believes tech stocks are overvalued and that the market is in a phase akin to 1999 before the 2000 Dotcom bubble.

“I do think we’re in a tech bubble,” Munson told Jen Rogers on the Final Round. “I think we’re beyond 1998 now. … sort of in the 1999 phase, where nobody’s going to bet against FAANG stocks.”

FAANG stocks refer to the five big American tech stocks: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (formerly Google, GOOG). Munson asserted that investors were becoming very complacent in what has become an unsustainably frothy environment.

“The problem is that just because you can identify the bubble doesn’t mean it’s not going to go higher,” Munson said. “The question is, where are those valuations going to come down, and how much damage is going to be done going forward? Because again, when you start looking at it, if Amazon stays on this course, it’s going to be bigger than the East India Trading Company.”

The FAANG stocks. (Photo: Seeking Alpha)
The FAANG stocks. (Photo: Seeking Alpha)

The asset manager’s comments come on the back of BofA Merrill Lynch’s July Fund Manager Survey, where investors identified the long FAANG+BAT as the most crowded trade for the sixth straight month. (BAT refers to the Chinese tech giants: Baidu (BIDU), Alibaba (BABA), and Tencent.)

Taking a look at Amazon and Netflix, two stocks that Munson called overpriced, both are trading significantly higher than the S&P500 market index.

Amazon, Facebook and S&P500 year-to-date charts, as of 10am on 18 July 2018. Netflix and Amazon are both trading significantly higher than the index.
Amazon, Facebook and S&P500 year-to-date charts, as of 10am on 18 July 2018. Netflix and Amazon are both trading significantly higher than the index.

Amazon & Netflix

Amazon’s stock is currently trading at 231.89 times earnings (or P/E ratio).

The company, which just completed its annual Prime Day and is calling it the biggest one ever, is continually looking for new markets to disrupt.

It’s almost like an endless market to disrupt,” Munson said. “With Facebook, they have one market that they disrupted, which is ad sales. Google had one market they’re disrupting, which is ad sales.” Amazon is “basically is just going and destroying capital.”

Notable Amazon acquisitions.
Notable Amazon acquisitions.

Netflix also has a high P/E ratio, at 251.38.

“If you like overpriced stocks, I think this is the one to go,” said Munson. “I mean, in the last year, they’ve burned through almost $2 billion. And so when analysts start talking about their negative cash flow, it’s not my type of stock. But I would be far more interested in the stock if it was down 12% and stayed down for some reason.”

For context, the S&P500 is trading at 24.34 times earnings.

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