Chris’ note: As regular readers will know, we’re bullish on a range of disruptive tech here at Legacy. This includes 5G… artificial intelligence… and gene editing.

But this year, some of the world’s highest-flying tech stocks have taken a beating. Shares in video conferencing company Zoom (ZM) are down 59% from their high for the year. Shares in high-tech exercise bike company Peloton (PTON) are down 76% from their high for the year. And the ARK Innovation ETF (ARKK) – which is full of tech stocks and was one of the best performers of 2020 – is down 41% from its 2021 high.

Many in the mainstream media are running around with their hair on fire over the sell-offs. So I reached out to our tech expert, Jeff Brown, to hear his thoughts. Jeff is a Silicon Valley insider and early-stage tech investor. And as you’ll see from our conversation below, he has a different take on what’s going on.

He says some “toxic” tech stocks are due to fall. But best-in-breed tech stocks are set to soar in 2022…

Q&A With Jeff Brown, Editor, The Bleeding Edge

Chris Lowe: One of the big stories right now in the financial press is the sell-off in some of the highest-flying tech stocks. I even read a story on CNBC that compared what’s going on to the dot-com bust at the beginning of the 2000s. What’s your take?

Jeff: Well, I can certainly see why the media is latching onto that kind of sensationalism. There’s nothing new about that. I should point out, that I haven’t recommended any of these high-fliers, as you call them. But I’ve been keeping a close eye on what’s going on. And as my readers will know, I’ve been calling some of the more popular tech stocks “toxic tech.”

Back in August, for instance, I warned readers of my free tech investing e-letter, The Bleeding Edge, that some darling tech stocks that were due to go public were set to fall by as much as 90%.

Wall Street loves to “rip our faces off” by shilling overhyped stocks to unsuspecting retail investors. Not only do I not recommend these types of tech stocks… I go out of my way to warn folks that most of them are downright toxic for your portfolio.

Chris: What is it about these overhyped stocks that makes them toxic?

Jeff: There’s not necessarily anything fundamentally flawed with their businesses or anything else they’re doing wrong. It’s more a function of their pricing.

In many cases, like with the names you mentioned, investors have bid up share prices to such absurd valuations, I foresaw that many share prices would get absolutely crushed.

It’s no surprise to me that we’ve seen declines of this magnitude. The correction I expected is playing out. It’s just a matter of lofty valuations coming back down to earth. Some of these companies were trading at enterprise values that were 100x annual sales.

That’s 100 years of sales, not even profits. I don’t care how fast you think you’ll grow. At those valuations, further price rises start to become unsustainable. Even after pulling back 60%, some of these stocks are still very expensive.

Chris: In your view, what’s the catalyst for the drops?

Jeff: One of the reasons we’re seeing such choppy action in the tech sector is it’s the end of the year. That’s typically when a lot of hedge funds and institutional funds rebalance their portfolios.

Around Thanksgiving into Christmastime, fund managers tend to lock in profits and secure their annual bonuses, which are often calculated based on their performance over the year. When they run the rule over their positions… and they see they’re carrying a stock that’s trading at 80x or 100x annual sales… they lighten up.

It’s normal to see this kind of volatility right now. It doesn’t mean, as some in the media are claiming, that a second dot-com bust is upon us.

Chris: How have you been handling the volatility in your model portfolios?

Jeff: The approach I’ve taken is to lock in profits when high-fliers take off by recommending that my readers sell half of their positions. A perfect example is digital contracts company DocuSign (DOCU). It uses cryptography to allow its users to digitally sign legal contracts. It was a major beneficiary of the pandemic because it allowed companies to continue to work with contracts without having to meet face to face.

I recommended the stock at The Near Future Report, which is my large-cap tech investing advisory, at the start of June 2019. And I recommended my subscribers close out half their positions midway through July 2020. This locked in a gain of 259%.

This allowed my readers to take some profits and use them to buy stocks that were trading at more attractive valuations. It turned out to be the right move. DOCU is about 21% lower today than where it was when I issued my sell alert. I still believe in this stock. But it can be a bumpy ride. So I’m glad I was able to help my readers lock in gains.

I’ve also recommended closing positions entirely. For instance, last month, I issued a sell alert for a semiconductor company called Ambarella (AMBA) for a 340% gain. I had recommended this stock in March 2019 at my small-cap tech investing advisory, Exponential Tech Investor.

AMBA is a fantastic company with amazing products and a great growth profile. But it was trading too far ahead of itself in terms of its valuation. And I was expecting this type of seasonal volatility. So it was a great time for my readers to take profits.

Chris: What do you see ahead in 2022?

Jeff: I’m confident the tech sector will have a fantastic year in 2022 as demand for everything from 5G devices… to advanced robotics… to cloud computing… to electric vehicles and self-driving cars soars.

We’ve just been through two years of record levels of funding in private tech and biotech companies. These companies are innovating at speeds we’ve never seen before, which is bringing new tech and therapies to market at an unprecedented pace.

There’s still a backlog of hundreds of exciting private companies lining up to go public in 2022. These newly trading public companies will create great investment opportunities for us.

It’s all about weeding out the media darlings that are too richly valued. That’s what I’ll continue to do at The Near Future Report and Exponential Tech Investor in the new year.