Technology stocks have risen sharply this year, thanks to the trend towards working from home, increased online shopping and very positive market sentiment, Zhitong Financial APP has learned. However, its valuation has risen to a very high level, which may limit the further upside of technology stocks.

In addition, some of these technology stocks have been further undermined by the bullish case of these companies due to adverse factors such as antitrust investigations by regulators. As a result, when U. S. stocks came under pressure again in early September, technology stocks were the hardest hit. If market sentiment turns negative, these stocks are likely to decline further.

Analyst Jonathan Weber believes that a shift to investments with less risk, lower valuations and less volatility may be a good choice. He selected five high-quality dividend-paying stocks from the "dividend aristocracy" (Dividend Aristocrats), which provide above-average income-generating capacity.

Technology stocks may continue to pull back.

Investing in technology stocks, especially the tech giants, has made a lot of money year-to-date. Big tech stocks such as AMZN.US and AAPL.US have been very strong over the past eight months.

As of Sept. 10, the Nasdaq ETF (QQQ.US) has risen 28.61% year-to-date, while big technology companies such as Amazon, Apple, MSFT.US (MSFT.US), Facebook (FB.US), Netflix (NFLX.US) and Salesforce (CRM.US) have risen even higher this year, and Tesla, the auto tech stock, has risen surprisingly this year.

However, share price growth is mainly driven not by earnings growth, but by rising valuations, as shown in the chart below.

In the first eight months of this year, the earnings multiples of these companies were expanding, in some cases almost skyrocketing. Apple, which traded at about 20 times earnings at the start of the year, is now valued at about 40 times its net profit, while Tesla's earnings multiple has risen from about 60 to about 240.

When share price increases are driven by multiple expansion rather than earnings growth, it is doubtful how sustainable they are. If market sentiment changes, it is not surprising that many of these high stocks will produce a correction for most or all of them.

Analysts believe that several factors could contribute to the mood change, such as regulatory antitrust investigations into tech giants, or the possible emergence of COVID-19 vaccine. If the fight against the epidemic is successful, non-technology companies should benefit the most, while technology companies, as beneficiaries of working from home, will lag behind.

In early September, analysts thought the first signs of a shift in sentiment had emerged, as previously high technology stocks grossly underperformed the broader market.

As the chart above shows, the Nasdaq ETF is down nearly 11% from its peak, while apple, Microsoft and Amazon are down nearly 11% and 16%. Meanwhile, Tesla pulled back 30 per cent in just a few days.

Analysts believe that under the current high valuations of technology stocks, other sectors with lower valuations may provide better risk-return prospects. Some shares in the ProShare S & P 500 dividend aristocrat ETF (NOBL.US) are trading at fairly low valuations. Most importantly, dividend aristocrats usually do well in falling markets.

Analysts point out that because dividend aristocrats are solvent and beta is usually less than 1, these stocks usually fall no less than the broader index when the market falls, making them an ideal choice for risk-averse investors looking for stable investments.

1. Aberdeen (ABBV.US)

Aberdeen is a leading biopharmaceutical company in the United States, mainly active in the fields of immunology, virology and nephrology. Aberdeen is now one of the biggest revenue earners in pharmaceuticals as a result of the acquisition of Allergan, another pharmaceutical company.

Alberto's Cash Bull product, Humira, is currently the best-selling drug in the world, but as its US drug patent expires in early 2020, there is some uncertainty about its revenue performance in the next few years.

However, analysts believe that the company's fast-moving anti-inflammatory drugs Upadacitinib and Risankizumab, which target similar indications, should be able to replace most of the current revenue, and the growth of other drugs should also help keep the company's revenue from falling.

Still, there are a lot of concerns about the expiration of the patent, which provides a buying opportunity for investors because Aberdeen's share price still has room to rise compared with past highs.

The stock currently has an PE multiple of 8.8x, while the PE multiple based on next year's earnings is even lower, at 7.5x. This represents a very large discount and margin of safety compared to the average PE multiple over the past three and five years. Measured by the stock's historically high valuation, Aberdeen's share price still has great potential to rise.

But even if share prices fail to rise in the short term, analysts believe investors can still benefit from its high dividend yield of 5.2%. At the same time, Aberdeen's beta is below average at 0.69, which means its share price will not fall too much if the market falls again.

two。 Chevron (CVX.US)

Chevron is one of the largest energy companies in the world and a member of the world's oil "supermajors". In addition to the upstream business of oil and gas exploration projects, Chevron also has huge downstream assets such as the production and sale of oil products.

Although oil prices have rebounded a lot from the all-time lows set by health events, they still suffer heavy losses compared with the same period last year. Chevron's share price also fell sharply in 2020, down 32.47% year-to-date.

Although it may take several years, Chevron's share price will rise by about 50 per cent when oil prices return to pre-public health levels, to recover to pre-health levels, Jonathan Weber said. However, the rising potential of its share price is not the only reason to buy Chevron.

The company also has one of the strongest balance sheets in the industry and generates more free cash flow than peer XOM.US because of low growth capital expenditure. As shown in the chart below, Chevron has the lowest debt-to-equity ratio (debt-to-equity ratio) among its peers, which enables the company to weather current public health events.

The company generated $5.5 billion in free cash flow over the past four quarters, while ExxonMobil's free cash flow was negative $1.6 billion over the same period. Analysts think this may be one of the reasons why the latter was kicked out of the Dow, while Chevron maintained its position.

At current share prices, Chevron's dividend yield is 6.5%, which is attractive, while analysts say its strong balance sheet and free cash flow over the past year mean the risk of cutting dividends here is not too high.

3. Realty Income (O.US)

Realty Income is a real estate trust fund (REIT) company, mainly invests in commercial real estate of single tenant, its tenant includes drugstore, fitness center, dollar store and so on. This diversified investment across many different industries provides a lot of protection against the downturn in the real estate rental industry, and Realty Income has performed well even in the current public health crisis.

In the second quarter, Realty Income's working capital per share (FFOPS) was 86 cents, exceeding market expectations and up from 82 cents in the same period last year. So even in the current crisis, the company has been able to keep growing. Analysts believe the company's profits are still on track to hit a new record this year, and the stock is at least reasonably valued.

As shown in the chart below, the multiple of Realty Income's share price to cash flow is slightly higher than the long-term median, which analysts say is beneficial compared with the broader market, especially technology stocks, because the trading volume of these stocks is much higher than the long-term average. Judging from the multiple of Realty Income's enterprise value and EBITDA, analysts believe that the stock looks very reasonable compared with past share price valuations.

At current share prices, Realty Income's dividend yield is 4.3%, more than twice the yield of the broader market. With monthly dividends, Realty Income provides investors with a very reliable regular source of income. On the other hand, its beta value is only 0.63. The share price of Realty Income does not fluctuate much, and its decline may be below average when the market is in the doldrums.

4. Johnson (JNJ.US)

When it comes to high-quality dividend aristocrats, health products giant Johnson must have a name. The company is not only the world's largest health care and care products company, but also one of only two companies in the United States with an AAA rating, and the other is Microsoft.

Johnson is not a company with a very high growth rate, but through some organic growth, improved profit margins, acquisitions and share buybacks, the growth rate of earnings per share in the past was very attractive.

Analysts now expect Johnson's earnings per share to grow at an annual rate of 6 per cent in the long run. Johnson's dividend yield is 2.7%, higher than average. Combining the two, Johnson's total rate of return will be high in single digits, and the stock is less risky and can be regarded as an attractive investment.

However, Johnson's talc products face litigation because of the risk of causing cancer. Analysts said that thanks to Johnson's very diversified sources of income, his resilience to recession, his strong balance sheet and his excellent track record, these risks seemed very manageable.

Johnson's valuation has always been quite high, which can be explained by its quality indicators and fortress balance sheet. By comparison, its current PE multiple in 2021 is about 16.58, which seems quite cheap.

At the same time, Johnson, which has an AAA credit rating, has a dividend yield of 2.7%. Compared with the 0.7% yield on AA-rated US Treasuries, Johnson seems to be a good choice.

5. Essex Trust (ESS.US)

Essex Trust is a real estate investment trust company that invests apartments in major cities such as Los Angeles, California and other select markets on the West Coast. Its main target customers are tenants with above-average incomes, which is why rent recovery rates have not been affected much in the current health crisis.

Since going public, Essex has returned more than 15 per cent a year, easily outpacing major market indices and most of its peers. The management obviously knows how to run the real estate business successfully. But the real bright spot of the stock is that Essex Trust is now valued at a fairly low price.

Essex's valuations are historically low, whether in terms of price-to-book ratio (real estate value is much higher than US GAAP), corporate value-to-EBITDA ratio, or share price-to-cash flow ratio. The share price that rebounded to the pre-public health crisis would be equivalent to a rise of about 50 per cent.

Summary

Although there is no guarantee that technology stocks will fall in the foreseeable future, expensive things will always become more expensive. But stocks traded at historically undervalued values, such as Aberdeen, Johnson and Essex Trust, seem to have a better risk-return than companies at historically high valuations such as Apple or Tesla.