The so-called Magnificent Seven stocks have been leading the U.S. market this year, but now they look richly valued by many key measures — and they’re crowded trades.
One in five funds have more than 40% of their holdings in the Magnificent Seven, says Bank of America. “Upside risk may be capped,” says B. of A. strategist Savita Subramanian. Crowded trades can be risky for two reasons. If there is trouble in the market and investors panic, the exits get jammed, which can worsen declines. Second, if almost everyone owns these stocks, who is left to buy?
The Magnificent Seven — Apple Inc.
; Microsoft Corp.
; Nvidia Corp.
and Meta Platforms
— have given investors tremendous rewards. But now it’s time to look at tech-sector alternatives.
Second-tier tech names
For tech exposure now, it makes more sense to consider what I call second-tier tech names. This does not mean they’re lower quality. It just means they are not on everyone’s radar. But insiders like them a lot. In each of the second-tier tech names suggested below, insiders have been buying not too far below current prices.
In contrast, there’s nothing but selling in the Magnificent Seven. Let’s be clear, selling in tech names isn’t a negative. Tech insiders get paid in stock so when they sell, they are just collecting their pay. It is not necessarily because they are negative on the shares.
Now, let’s look at three second-tier tech names that insiders like:
1. Asana: Asana
is a play on better workplace efficiency. Former Facebook manager Dustin Moskovitz is the company’s founder and CEO (founder-run is a plus in investing). Asana offers a “Work Graph” that helps people get organized. As of the end of July, the company had 20,782 customers, up 15% from the year before. Retention rates are solid. Sales grew 20% in the second quarter.
The stock recently traded at a price to sales ratio of 4.8, versus its five-year average of 10.) Moskovitz has purchased $67.3 million worth of stock this year at prices between $19.80 and $24.40, most recently at the end of August.
2. Akamai Technologies: Akamai Technologies
recently traded at a forward p/e of 16.8, a 9% discount to its trailing average of 18.5. It also has a PEG ratio of 2.1, below the cutoff of 2.5, which signals a discounted valuation for growth names in tech.
Since the turn of the year, founder and CEO Thomas Leighton has purchased $2.7 million worth of stock at prices between $72.40 and $93.80. Leighton has a good record for timing purchases.
Akamai is a tech company in transition. Leighton is a former MIT professor and tech visionary who figured out early in the internet revolution how to replicate and deliver content over a large network of distributed servers. Akamai’s technology supported the internet-based video you’ve watched on YouTube, Netflix, Amazon, Apple products and Facebook.
Akamai’s problem is that in recent years a lot of its customers figured out they could do this job in house, at a lower cost. Rather than just stand still, Akamai has pivoted to cybersecurity, in part via acquisitions. The strategy is paying off. Security-related sales grew 14.4% in the second quarter, offsetting declines in delivery revenue of 8.2%. Total sales grew 4.4%.
3. Workday: Workday shares
recently traded at a forward price-to-earnings ratio of 41.5, a significant discount to the five-year average of 73.8. It has a PEG ratio of just 1.4. Co-CEO Carl Eschenbach bought $2 million in shares at $236 to $241 at the end of August.
Workday provides financial management, human capital management (HCM), planning and analytics apps. Workday is now the HCM platform for about half of the Fortune 500 companies, says Morningstar analyst Julie Bhusal Sharma. Second-quarter sales grew 16%.
The company was co-founded by Aneel Bhusri, who is now co-CEO. Morningstar’s Sharma says Workday has a wide moat around its business because of switching costs, another plus. Switching costs offer a protective moat when the time it takes to implement and learn new software would hurt productivity too much. The second quarter brought early renewals coupled and longer contracts, confirmations of customer “stickiness.”
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned ASAN and AKAM. Brush has suggested ASAN, AKAM and WDAY in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
More: Here’s an easy way to make a more concentrated play on the ‘Magnificent Seven’ stocks
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