After a year of exuberance surrounding artificial intelligence (AI), some US stocks are now overvalued. And this has brought the bears out, with one pessimist claiming the stock market is set for a crash.
This investor is Michael Gayed, a portfolio manager at Tidal Financial Group. In February, he noted the widening gap between mega-cap technology stocks and nearly every other public company. “I still think we’re all in a lot of trouble,” he concluded rather ominously. “All bubbles end.”
Then in March, Gayed cited the rising price of gold, long-term Treasury bonds and utility stocks (three traditional flight-to-safety assets). This, he argued, could be a sign of bad things to come for the stock market.
High valuations
To be fair, he has a point. The recent rally in mega-cap stocks has pushed the price-to-earnings (P/E) ratio of the S&P 500 index to around 27.
Excluding the pandemic when earnings were thrown all over the shop, that’s the highest it has traded at in 15 years.
Meanwhile, the tech-driven Nasdaq 100 index trades for about 32 times earnings. That’s certainly a giddy multiple.
Now, around a third of my portfolio is made up of Nasdaq-listed stocks. So how am I processing all this?
Well, the first thing to say is that I’m not selling too much. That’s because nobody knows whether we’re really in a bubble or where the top of the market is. I buy stocks to hold for many years. I’m not a trader.
That said, I do recognise the lofty valuation metrics here. So I’ve been shifting my focus.
UK shares aren’t frothy
One FTSE 100 stock that’s been turning my head lately is equipment rental firm Ashtead Group (LSE: AHT).
Quite literally, as it happens. I’m forever driving past the company’s bright green and yellow Sunbelt Rental kit on the side of the road. A digger here, a generator there.
Perhaps that’s not surprising. This is the largest plant hire company in the UK (and second in the US).
The share price has tumbled 12.5% since 5 March after Ashtead warned that revenue for the 12 months to 30 April is now likely to be at the lower end of its 11%-13% guidance range. Or about $10.9bn.
One issue has been a lack of major disasters like floods, hurricanes and wildfires in North America. While that’s undoubtedly great for everyone else there, it has put a dampener on demand for Ashtead’s equipment used to clear up the aftermath.
The stock now trades for 17.5 times earnings. There’s risk in this valuation if earnings are further revised down this year.
However, I’m more interested in the next decade. There’s a structural shift towards renting equipment rather than owning it. Yet rentals still only make up 55% of the massive US market, so the opportunity is vast.
Ashtead has spent nearly $2bn on dozens of bolt-on acquisitions stateside over the past couple of years. Yet it’s hungry to secure more market share and continues to hoover up smaller competition and add more depots.
That seems smart when there’s around $2trn worth of huge US infrastructure projects starting over the next few years.
To my mind, Ashtead is the FTSE 100’s best long-term growth story and I’m keen to buy more shares.
