Prem Watsa (Trades, Portfolio) has a top holding in cell phone maker BlackBerry Ltd. (BBRY, Financial), but early in 2015 he said many major companies of the high tech industry were in speculation territory.
Watsa, the founder of rapidly growing, Berkshire Hathaway-style Fairfax Financial Holdings (TSX:FFH, Financial) is a conservative investor who buys low-priced, low-valuation stocks. In the past several years, some of his standout investments included gutsy bets on the Bank of Ireland and in careening Greek companies. He panned tech stocks in his annual letter this year though, listing companies he viewed as overvalued in a table.
“I am always amazed at the speculation that can take place in the stock market, as shown in the table below, and how long it can last,” he wrote in letter, released March 2015.
Watsa also said he was “confident that most of this will end as other speculations have – very badly!”
Many of the companies Watsa named have gone disparate directions this year since he mentioned them, some soaring and some possibly already seeing their bubble begin to burst, as seen in the chart below, comparing the numbers from Watsa's table wtih today.
Valuations were also telling. Two of the companies posted a net loss, Netflix’s P/E ratio increased by 181%, and two of the companies’ P/E ratios increased by double digits. Yelp (YELP, Financial)’s, with the biggest decline, sank by 72% to 102. None four of the companies in the Other Tech/Web category reported earnings.Â
With each company except one, Groupon (GRPN, Financial), reporting continued growing revenue, only three P/S ratios increased, while eight became lower.
The companies' average stock price increased by 7% year to date, compared to the S&P 500 Equal Weight High Technology Index return of 0.8%, and the S&P 500 Index decline of 0.97% year to date.Ă‚ But there were large variations. Netflix, the highest performer, soared 142% this year.
Two of the Tech/Web companies, Service Now (NOW, Financial) and Salesforce.com (CRM, Financial), also gained double digits, while reporting no earnings. Of the 11 companies, six saw their shares increase, and five saw them declines.
By valuation, the tech companies became pricier as their P/E ratios increased by 25% on average, if they reported earnings. Their P/S ratios decreased by an average of 16%.
Overall, the tech companies Watsa defined as speculative were slightly higher priced, higher valued by P/E ratio and lower valued by P/S ratio. The two that gained significantly in price, Netflix (NFLX, Financial) and Facebook (FB, Financial), became far more expensive by P/E ratio, however.Ă‚
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