YEESH, WHAT THE HECK has happened to technology stocks? Investors lately have developed a distinct loathing for the sector, with large-cap tech singled out for special derision. The sector is experiencing a level of disdain that hasn't been seen for eons: Bernstein Research analyst Toni Sacconaghi pointed out in a fascinating research report last week that tech shares lately have dropped to their lowest valuation, relative to the S&P 500, in nearly 20 years.
Sacconaghi writes that tech stocks now trade at 1.0 times the S&P on a forward P/E basis, a valuation last seen in March 1991 and dramatically below the historical average since 1977 of 1.31 times. This comes while the cash on tech balance sheets is at or near record levels, both in absolute terms and relative to the stocks in the S&P.
And note that whatever it is that ails tech is widespread, with similarly depressed valuations afflicting hardware, software and services companies alike. Not least, keep in mind that the valuation compression has largely taken place over just the past few years–at the end of 2007, tech stocks traded at 1.32 time the S&P multiple on forward earnings, right in line with the sector's historical average. (more)