Technology stocks could see a 15 percent correction in a few months, one fund manager told CNBC on Thursday, adding that he is selling shares of Apple, Alphabet, and Microsoft because they are "fully priced".
Patrick Armstrong, chief investment officer at Plurimi, said that the companies have reached their "full valuations".
"I feel sad, but I'm selling all my big cap tech companies. For years and years, I've been coming on talking about Apple's cheap, Alphabet's cheap, Microsoft's cheap, and they're above market multiples now. We have been reducing them into the rally for the past few weeks and they are getting fully priced in my opinion," Armstrong told CNBC.
The fund manager said that he will likely own the stocks that he sold again by the summer after a 10 to 15 percent correction takes place. The reason, Armstrong believes this will happen, is because, on a Schiller-adjusted price to earnings ratio, the is trading at 29.3 times. The mean for the S&P 500 is 16.7.
This is a valuation metric which takes real earnings per share over a 10-year timeframe adjusted for inflation, to work out the valuation of an equity index.
Armstrong said that there have only been two other times that U.S. stocks have traded at this level – on Black Tuesday in 1929 when markets crashed, and in 2000 when the
"So there's lots of good news, interest rates are going to stay low forever, we are going to have
'Full valuations'
Tech stocks have seen a rally in recent months. Alphabet shares are up 19.7 percent year-to-date, Apple has rallied 27 percent, while Microsoft has risen 11 percent. The tech-heavy Nasdaq index also recently touched a record high.
Meanwhile, all of these companies have reported their earnings for the fourth quarter of 2017. Apple beat market expectations on earnings per
Analysts are bullish on these companies for different reasons. For example with Apple, the market is expecting its iPhones to kick off a "supercycle" of upgrades, while Microsoft is seeing strength in its cloud business. Armstrong explained that there is nothing wrong with the fundamental of the businesses, and that's why valuations have risen.
"When you get the full valuations, the fundamental view is all reflected and everything is looking reasonably good. I think for most of these companies, it's in the prices."
Opportunity to buy?
While there could be short term profit taking, the long-term trend for the large tech companies looks solid, Neil Campling, head of technology,
"The earnings multiples for these companies are partly wrong on the basis that actually, I think there is power in the earnings cycle. I don't think people have got the right earnings forecasts if you are looking into 2017 and 2018,"
He pointed to shifts in the use of technology such as the rising demands for robots which will boost demand for chips and other hardware, as well as an upcoming "supercycle" in high-end phones such as the Samsung Galaxy S8 and next generation iPhones set to be released later this year.
But
Repositioning
Armstrong's tactic, for now, has been to buy U.S. chipmakers Qualcomm and Intel.
"Those are companies that don't seem to have the euphoria around them, they still trade at below teens multiples, they've got issues," Armstrong said.
The fund manager explained that Qualcomm is currently in a legal battle with Apple, as an example of one of the issues facing the company.
"The other companies … don't have the issues and that's why the prices are at the more lofty multiples."
