Tech stocks are much cheaper and higher yielding than they were at the peak of the dotcom bubble.
Earlier in March, when the Nasdaq topped 5,000 for the first time since 2000, some analysts drew parallels between tech companies then and now.
But in a recent note, Merril Lynch chief investment officer Ashvin Chhabra wrote that the firm prefers stocks over bonds, and tech is one of their favourite sectors.
“After a 60% run for the tech-heavy Nasdaq over the past two years, in which it outperformed the S&P 500 by over 15%, valuation multiples for the Technology sector have risen. However, at roughly 16.8 times the 2015 earnings forecast by BofA Merrill Lynch Global Research’s equity strategy team, Tech stocks are nowhere near the lofty valuations of 2000.“
Tech companies have some of the strongest balance sheets, great earnings growth, and the highest ratio of analyst upgrades to analyst downgrades for any sector, Chhabra wrote.
Ultimately, investors must be careful to select stocks in the sector that have the potential for long-term returns, he wrote.
“In general, we favour ‘old tech’ companies due to their ability to generate steady cash flows and consistent earnings growth. Many are paying healthy dividends, which add to their appeal.”