In The Tech Space, Internet ETFs Are Getting Pricey
Tech investors may want to steer away from pricey Internet stocks. Internet stocks are trading at a significant premium to the broader tech sector. Consider broad-tech ETFs for growth exposure. Growth stocks tend to fly high, but Internet stocks and sector-related exchange traded funds may be trading at dangerously overvalued levels relative to the broader market. Year-to-date, the PowerShares NASDAQ Internet Portfolio ETF (NASDAQ: PNQI ) gained 8.6% and the First Trust DJ Internet Index ETF (NYSEARCA: FDN ) increased 9.4%. David Seaburg of the Cowen Group argues that Internet stocks are now trading at a much higher premium than usual, which suggests that the sector may be overpriced and investors are more at risk, reports Alex Rosenberg for CNBC . Seaburg points out that while the price-to-earnings ratio of Internet stocks tends to be rich compared to the broader tech sector as a whole, the premium is exceptionally high now. For instance, PNQI is now trading at a price-to-earnings ratio of 44.2. FDN has a P/E of 41.6. Meanwhile, the Technology Select Sector SPDR ETF (NYSEARCA: XLK ) showed a P/E of 18.3. The analyst calculates that the valuation premium for Internet stocks is two standard deviations above its average, which by definition should only occur some 2.5% of the time. Consequently, Seaburg warns that Internet stocks are now at an “inflection point” where the sub-sector could experience a violent turn. “The last time it was there, we saw a massive selloff in the space,” Seaburg said on CNBC. Nevertheless, the analyst does not suggest that the valuations are an indication of a major downturn in the space, but more of a warning of a potential short-term correction. “I’m just suggesting that they could pull back before you step in and make a decision to actually buy these,” Seaburg added. “It’s maybe just a little bit overextended – you’ll probably see more of a near-term pullback.” On the other hand, Ari Wald, head of technical strategy at Oppenheimer, believes investors should lean toward larger tech names in the meantime as the underperforming sector has “plenty of catch-up potential.” “Some of the bigger-cap tech names probably are a little bit more attractive here,” Wald added. For instance, ETF investors can take a look at the iShares U.S. Technology ETF (NYSEARCA: IYW ) , which focuses on sturdy, “old school” tech giants , such as Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ) and International Business Machines (NYSE: IBM ), among others. IYW has a P/E of 18.9. Disclosure: The author is long AAPL, MSFT. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.