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ASX tech update: Are WAAAX shares about to be punished?

According to the Australian Financial Review, a top fund manager thinks that investors are about to fall out of love with the WAAAX stocks.

“What, how can that be?” I hear you yell. The WAAAX stocks have been our favourite market darlings for a few years now and 2019 has done nothing to dent that reputation, with Afterpay Touch Group Ltd (ASX: APT) up 126% YTD and Appen Ltd (ASX: APX) up 130%.

Here’s what Hugh Dive, Chief Investment Officer for Atlas Funds Management had to say: “It is tough to see significant capital gains in the ASX over the next 12 months… we see that over the next year, the bulk of the returns that investors will get from investing in Australian shares will be from dividends, not capital gains.”

Mr Dive also points out that the market is currently valuing the WAAAX stocks’ collective earnings of $170 million at $29 billion on recent prices. On this statistic, it is hard to argue with the man. There is little doubt (to this writer anyway) that there is a LOT of optimism built into the WAAAX shares, given some of them are not even profitable yet (yes, I’m looking at Afterpay). Bulls can throw all sorts of growth numbers and projections around, but the cold, hard numbers don’t lie. At this time, these stocks are (in my opinion, but with little question) overvalued.

Mr Dive expects investors to wake up to this fact and begin moving some of the significant capital currently invested in growth stocks over to companies that pay rock-solid dividends.

What does the future look like for WAAAX stocks?

In my opinion, we are already seeing signs of this movement. ‘Bond proxy’ stocks like Transurban Group (ASX: TLC) and Sydney Airport Holdings Pty Ltd (ASX: SYD) have seen double-digit growth in their stock prices over the past year and currently have sky high price-to-earnings (P/E) ratios over 50.

It’s hard to find any stock that pays a healthy dividend that has fallen significantly during this time as well. Woolworths Group Ltd (ASX: WOW), a grocery chain with single-digit growth ahead of it (by estimations), is currently trading with a P/E ratio of over 27. These trends are likely to continue for the foreseeable future – there is no alternative and no way out for yield-seeking investors at the current time.

Foolish takeaway

In my opinion, investors will be increasingly drawn to safety going forward, so if you have any shares in growth stocks with low earnings, it might be time to think about taking some profits. These are certainly interesting times, and caution is needed now more than ever.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sydney Airport Holdings Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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