- Tech stocks sold off last week as 10-year Treasury yields rose.
- But the stocks are still good investments, argues Luke Lloyd of Strategic Wealth Partners.
- However, Lloyd said investors seeking alpha should look to individual small-cap names.
Investors sold off mega-cap tech stocks last week as 10-year Treasury yields rose to pre-pandemic levels, a sign of faith in the economic recovery to come.
According to Luke Lloyd, an investment strategist at Strategic Wealth Partners, such a pullback is a healthy thing near all-time highs, and investors shouldn’t sweat it.
At the end of the day, tech stocks are still a good investment, he said, and they can justify the high valuations that have led some to cry of a bubble. Especially consider valuations of some stocks tied to an economic reopening, like airlines and cruise lines.
“A lot of these [reopening] stocks from a valuation standpoint are higher than they were the day before the pandemic. The thing is, they’re not making any money,” Lloyd told Insider last week. “The cruise lines, for example, aren’t even offering any cruises. Air traffic isn’t getting anywhere close to where it was before the pandemic.”
“So why would I want to place my money into these stocks that are valued higher that are doing worse than they were pre-pandemic, when I could buy companies like tech and healthcare,” he continued. “Obviously their valuations are stretched a little bit, but they’ve actually grown and done better during the pandemic.”
He added that technology that has thrived in a lockdown environment, like cloud-driven services, will remain relevant even after the pandemic.
But beyond valuation, Lloyd argues that the economic recovery still has a long way to go. The official unemployment rate is still 6.3%, nearly 3% above pre-pandemic levels, and indicators of consumer confidence and small business optimism remain relatively low. This means interest rates will remain low, Lloyd said, a tailwind for growth stocks.
Tech stocks - along with much of the rest of the market - indeed bounced back Monday. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all rose well over 2% as 10-year Treasury yields stayed parked around 1.45%. BlackRock called stocks "resilient" in a Monday note.
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Still, even though Lloyd likes big tech stocks, he said investors will best be able to generate alpha - or returns above the market's benchmark indexes - in certain individual small-cap names as the economy heats back up.
It's a strategy that others, like Morgan Stanley, are advocating. While the market indices will likely see muted returns in the near future, certain cyclical sectors and individual stocks still present opportunities, the bank's strategists have said recently.
Though small-caps in general have outperformed over the last few months - the Russell 2000 index is up 45% since November 2 - there are stocks in the area that have more room left to run than others, particularly in healthcare and tech, Lloyd said.
One tech firm he likes is Stamps.com (STMP), a digital shipping firm. The stock dropped sharply in February after an earnings report, but Lloyd is bullish for its recovery.
"It's done very well, it crushed on every measure. The only problem was it didn't give guidance because it's kind of uncertain about the future," he said. "Investors don't like no guidance. Investors like clarity and certainty, right? So it sold off a little bit, we think there's still a lot of value there. That's a stock you pick up at these levels."
In healthcare, Lloyd said he likes three firms that will rebound as people become more able to get care for ailments following the pandemic: Stryker (SYK), an orthopedics firm; Tandem Diabetes (TNDM), a diabetes device maker; and Exact Sciences (EXAS), a cancer diagnostics firm.
"These all are stocks that are smaller that were helping fix epidemics before COVID, and the thing about epidemics is that they're not going away. There was pent up demand last year that's probably going to snap back this year as we open back up, people going back to the doctor," Lloyd said.
"Some people put off all these medical issues, there's demand for that right now," he continued. "So we think these stocks are going to continue to perform very well and probably deliver above expectations in earnings."