Is the Future Now for Buzzy Tech Stocks That Took a Fall?
The recent pounding many high-multiple companies have taken might tempt bargain hungry investors. Should they go hunting?
The market buzz of the past few years has been largely centered on futuristic companies with groundbreaking technologies that will “change the world.” We’re talking breakthroughs such as genomic sequencing, blockchain and metaverse infrastructure. Post-pandemic, these stocks went on a historic run and, alongside them, actively managed ETFs owning such stocks rode the wave higher.
But now some of those ETFs are down almost 50% from their highs. News like that naturally leads to two questions:
- Why did this happen?
- And does this crash present any opportunities for investors brave enough to capitalize on them?
First, Why Stock Bubbles Form
Most companies in this buzz-filled category share one thing in common – they are unprofitable. Why would anyone want to own a company that loses money every year? Well, because at some point in the future, there is a possibility that they will be wildly profitable. But it is incredibly hard to assign a value to a possibility and thus, when bubbles form, it is typically in stocks such as these. The “dot.com” bubble of the late '90s and early 2000s is a larger analog.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Why is this category more bubble prone? Because there is little burden of proof when making predictions of potential. It is much easier for a charlatan-esque ETF manager to make claims that will not be validated for another 20 years or more. They may be gone from the industry by then. The valuation of a boring consumer staple company with a track record of increasing profits and cash flows is more accurate, because the concept has already been proven. Thus, paper towel makers typically don’t get bid to nose-bleed valuations – and managers who own them don’t get famous.
What to Consider Going Forward
Over the past year, the most noteworthy “innovation” ETF crashed nearly 60% from its high to its low. Other tech innovators have also struggled. So, this most recent bubble has burst, what now?
There is rubble everywhere, in the form of innovative tech stocks way off their highs. Should you pick through them? Twenty years ago, some of our current megacap tech stocks were in that rubble and have surged thousands of percent since then. It is possible there are a few gems in this current rubble, the question is, can you find them? If you try, be sure to do your research because what may appear to be a “cheap stock” can always get cheaper, and some of these recent casualties may not be around in the future.
Alternatively, you could let the pros do it for you and buy one of the aforementioned ETFs that owns all of the rubble. The managers claim that each of their holdings will someday be highly successful but, in reality, whether they know it or not, they’re using something similar to the venture capital playbook – meaning that most of their ideas won’t pan out. In fact, only 8% of VC startups are successful, according to the Corporate Finance Institute. These VC investors rely on the few hot companies that do succeed to drive the returns, and the same will probably be the case for these ETFs.
If you plan to dip your toe in this category, do so with that understanding and have realistic expectations. Many investors burned by that 60% drop also watched that same ETF rally 380% post pandemic and might have thought, “This time it's different – these stocks really will grow to the sky.” But in the stock market, it is rarely different.
* Securities and advisory services offered through LPL Financial, a registered investment adviser. Member FINRA/SIPC.
* Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risk including loss of principal. No strategy assures success or protects against loss. ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF's net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors. ETFs concentrating in specific industries are subject to higher risks and volatility than those that invest more broadly.
Disclaimer
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Securities and advisory services offered through LPL Financial, a registered investment adviser. Member FINRA/SIPC.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Brian Murphy is a Market Strategist and Investment Manager at Frazier Investment Management in Southern Rhode Island. Before joining the Frazier team, he served in the U.S. Navy for 11 years as a carrier jet pilot. Brian has experience managing several different strategies and products, including equity, fixed income, long/short portfolios and options. He believes that managing risk is the key to successful outcomes and works with clients nationwide to achieve their investing goals.
-
Setting Objective Criteria for Employee Bonuses Aligned With Company Goals
When employees win, the company wins.
By Stephen Nalley Published
-
A Modern Guide to Money Etiquette: Gifts, Tips, Splitting Bills and More
What is modern money etiquette? The customs for splitting a restaurant check, purchasing a wedding gift, tipping and more have evolved. These guidelines can help.
By Emma Patch Published
-
Potential Ripple Effects of Taxing Unrealized Capital Gains
The proposed tax on unrealized gains would be limited to those with a net worth above $100 million, but some see a broad impact on markets and businesses.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
-
Succession Musts: Thoughtful Planning and Frank Discussions
When it comes to passing on the family business, you don't want anyone to be surprised about who will control or inherit the business after the owner's death.
By David Handler, J.D. Published
-
Here's How to Find Your Way Out of the Inherited IRA Maze
To navigate complex rules on inherited IRAs and RMDs, start by breaking down key terms and common scenarios. A clearer picture of your next steps will emerge.
By Evan T. Beach, CFP®, AWMA® Published
-
Should You Move Your 401(k) to an IRA Once You Hit 59½?
Some 401(k)s allow for in-service withdrawals at age 59½, opening up greater investment options. Here are three reasons for taking the plunge.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
When It Comes to Insurance, How Much Risk Can You Take?
Either you or an insurance company takes on the risk of protecting your belongings from loss or damage. Can you afford to self-insure?
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Five Ways to Minimize a Higher Capital Gains Tax Rate
With Harris’ proposal to raise the capital gains tax rate (which would require congressional approval), investors might want to consider tax-lowering options.
By Michael Aloi, CFP® Published
-
Collar Investing Strategy Can Help Protect Your Nest Egg
Here are some key considerations for using the collar strategy of put options and covered calls to safeguard your wealth in retirement.
By Matt Amberson Published
-
Understand Your ESOP Benefit: The Diversification Option
You can sell your shares back to the company during your employment years, called diversification in ESOP terms. What are the pros and cons?
By Peter Newman, CFA Published