Hedge Funds Ignoring Tech Drop Boost Bullish Bets to 1-Year High

Updated on

Last week’s slump in biotechnology and social-media shares isn’t putting off large speculators. They’re the most bullish in more than a year on the Nasdaq 100 Index.

They increased their net-long positions on the U.S. equity gauge for a fourth straight week to almost 88,400 e-mini futures, according to data from the Commodity Futures Trading Commission. That’s the most since March 2014.

Investors are plowing more money into a bet that has been paying off since 2012, when hedge funds and other speculators turned bullish on the Nasdaq 100. Traders added $143 million to the biggest exchange-traded fund tracking tech companies last week, the most since January, data compiled by Bloomberg show.

“Tech is the first place investors look at if they’re focusing on growth,” said Virginie Robert, co-founder of Paris-based asset-management firm Constance Associes. “Some of these companies can generate a lot of cash, increase their dividend and buybacks. But not all tech is created equal.”

Financial results beat estimates at companies such as Microsoft Corp. and Amazon.com Inc., while Apple Inc. and Comcast Corp. increased plans to return cash to shareholders. Others weren’t as successful this earnings season. LinkedIn Corp. and Twitter Inc. tumbled more than 20 percent last week after revenue fell short of projections and they cut their annual sales forecasts.

That helped drag the Nasdaq Composite Index down 1.7 percent. An index tracking social-media shares sank the most since October, and the Nasdaq Biotechnology Index tumbled 5.5 percent, ending April at a two-month low. The Nasdaq Composite closed on Monday 1.5 percent away from an April record. Nasdaq 100 futures slipped 0.2 percent at 7:50 a.m. in London.

Earnings Growth

Analysts project earnings at tech companies in the Standard & Poor’s 500 Index will rise 14 percent this year, more than any other industry group. And firms are increasing buybacks and dividends.

Apple, the largest Nasdaq Composite component, briefly became the biggest source of dividends in the S&P 500 after raising its payout by almost 11 percent. The stock has rallied 17 percent this year.

Comcast said on Monday it would increase its stock-repurchase program by 59 percent to $6.75 billion this year. In March, Yahoo! Inc. also raised its buyback plan, while Oracle Corp. boosted its dividend.

Speculators have been net-long Nasdaq 100 futures for more than two years, with a peak in bullish positions in May 2013. Their bets proved right: Tech shares have climbed 44 percent since then, almost double the S&P 500’s advance.

Nasdaq Valuation

After a 5.9 percent gain this year, the Nasdaq Composite trades at about 22 times the estimated profits of its members, data compiled by Bloomberg show. That’s lower than its average multiple in the past 10 years and compares with a peak of 43.8 in 2001. The S&P 500 trades at 18 times.

To Constance Associes’ Robert, tech stocks are still worth it. And with almost 64 percent of Nasdaq Composite companies beating analysts’ earnings estimates this season, concern is easing that a strong dollar will dent profits, she said.

“Valuations are not so elevated if you consider what you’re paying for,” Robert said. “The risk-reward profile is high for tech. You need to favor quality.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE