Rare Valuation Opportunities Ahead in Some Megatrends ETFs

Estocks got off to a bleak start in 2022, with high-growth and technology stocks, especially stocks of unprofitable companies, among the worst offenders.

With a number of major growth and technology indices in or flirting with correction territory, a slew of exchange-traded funds are feeling the heat. These include funds dedicated to disruptive themes, such as the WisdomTree Cloud Computing Fund (WCLD), the WisdomTree Cybersecurity Fund (NASDAQ: WCBR), and the WisdomTree BioRevolution Fund (WDNA).

Cloud computing, cybersecurity and biotech/genomics stocks tend to trade at high valuations due to their impressive growth potential, and if there’s one bright spot in the recent slump in these sectors, it’s that rare valuation opportunities are now available. Importantly, discounts can be given while long-term fundamentals in these groups remain firm.

“The WisdomTree Cloud Computing Fund (WCLD) is currently valued at 11.5x price-to-revenue, the lowest level since the first few months of the COVID-19 pandemic. The premium to the Russell 1000 Growth Index is 102.0%, within 2% of the historic minimum of 100.8%,” said WisdomTree analyst Kara Mariciscano. “While WCLD’s valuation premium has contracted significantly, the expected revenue growth relative to the benchmark has not. Over the past year, WCLD’s revenue growth has been consistently forecast at an average of 1.7x that of Russell 1000 Growth.”

WCBR also deserves a rating-based look. After all, cybercriminals don’t go on vacation because cybersecurity stocks are collapsing. Likewise, businesses and governments are unlikely to rein in cybersecurity spending simply because some investors are souring the group.

“Like WCLD, The WisdomTree Cybersecurity Fund (WCBR) has been hit hard by the shift in the market, trading at a comparable level of 11.2x price-to-sale, roughly double the valuation of the Russell 1000 Growth Index” , adds. Marciscano.

Interestingly, while biotechnology stocks are on the decline, WDNA hasn’t fallen as much as stablemates WCBR and WCLD. However, after 2021, when a huge gap has emerged between large- and small-cap biotech, the time may be right to at least take a look at WDNA.

“That level of all-cap outperformance is unprecedented in the past decade and marks a sharp reversal from small-cap outperformance of 32 percentage points in 2020,” notes Marciscano. “In our opinion, this environment offers opportunities for WDNA, with a balanced exposure to small, mid and large cap companies, to take advantage of a potential small to mid cap biotech recovery in 2022.”

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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