Big Tech fund manager reveals how to trade expensive valuations — and the stocks to buy
Investors should focus on trading momentum rather than worry too much about lofty valuations in Big Tech stocks, according to chief investment officer Patrick Armstrong. Armstrong, who manages the Plurimi AI Global Equity Strategy, admitted that the near-15% rally this year in the S & P 500 led by the tech sector could be overdone. However, he stressed that he has no plans to sell Big Tech. “I’ve kept the mega-cap tech stocks that have really been the driver of returns for my portfolio and for the market,” Armstrong told CNBC’s Squawk Box Europe Monday. The technology component of the S & P 500, which makes up 28% of the total index, has rallied by 38% this year, according to FactSet data. It’s been boosted in particular by the expected demand for artificial intelligence-related services in the future. .SPX YTD mountain Meanwhile, the rest of the S & P is barely in the green, with 1.5% returns over the year so far. Yet Big Tech valuations have pushed the index’s forward average price-to-earings ratio to 21 times, its highest level since 2004, barring a brief period in 2018 and 2021, according to FactSet data. Despite his discomfort about these steep valuations, Armstrong said he’s not selling yet for two reasons. ‘Great momentum’ First, Armstrong stressed that understanding market momentum had played a significant role in his investment decisions, despite shaky fundamentals for many companies and economies. Referring to his significant positions in tech giants like Microsoft , Apple , Adobe , Fortinet , and ASML , Armstrong said: “There’s great momentum behind them. I can see the narrative why people want to own them.” “The biggest mistakes in my career have been selling something when it gets expensive, and it gets more expensive. I’ve suffered through doing that. In 2017, I sold a lot of those companies [and] bought them back in 2018,” he added. “It’s not something I’m pounding the table on that you’ve got to own the stocks today. But it’s something I’m going to let run.” ‘Dead money’ in a recession Second, Armstrong believes the market’s resilience is due to investors feeling overly secure in the stocks driving the rally. “The reason the tech stocks really rallied is that it’s AI-driven, and it was a way to hide from a recession and that the Fed was going to be cutting rates,” he said, adding that this narrative is beginning to weaken as the market prices in higher interest rates for longer. Armstrong added that if the economy slips into a recession, the recent tech rally could become a period of stagnation, with Big Tech stocks treading water as they attempt to grow into their lofty valuations. “I think that is a risk that maybe they don’t collapse, but they just become dead money while they have to grow their way into the multiples they’re trading at, and there’ll be a bit of a catch-up trade,” he said. Short positions The fund manager, however, warned that there were risks in other parts of the technology sector. “These are companies that are benefiting from a tech rally, benefiting from AI, but I don’t believe the narrative is stronger than the fundamentals,” Armstrong said. He revealed that he has short positions in electric car makers Rivian and Nio , and German online food delivery firm Delivery Hero . Investors who hold short positions benefit when a stock falls. They do this by borrowing shares from other investors to sell immediately; they then repurchase the shares later when the price is lower and profit on the difference. “I’m very happy to own mega-cap stocks that are producing lots of cash flow, buying back shares … the no-earnings tech companies, the disruptors that are going to grow their way into incredible market caps already, I don’t buy,” he added.
