As earnings season gets underway, we're trimming these 2 high-multiple tech stocks - CNBC

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Shortly after the opening bell Monday, we're selling 125 shares of Microsoft (MSFT) at roughly $225.98 a share and 100 shares of Nvidia (NVDA) at roughly $152.22 a share. Following the trades, Jim Cramer's Charitable Trust will own 200 shares of Microsoft, decreasing its weighting in the portfolio to about 1.61% from 2.59%, and 200 shares of Nvidia, decreasing its weighting in the portfolio to 1.06% from 1.58%. We're kicking off the new week by making some sales in 2 of our highest price-to-earnings (PE) multiple technology stocks. Our concerns around high-multiple tech firms stem from the market's challenge of correctly valuing them. As Jim explained in his weekly Sunday column , we have a bifurcated market right now. "There are two sets of companies: one with reasonable price-to-earnings ratios, and one with unrealistic multiples. The largest market caps still have unrealistic P/Es even as they have shrunk dramatically in the last year…The bottoming process for most companies has occurred, which is why I don't fear the coming earnings season. But the bottoming process for high-growth tech is pretty unfathomable because it was never valued right in the first place," Jim wrote. In addition, companies that have high multiples set the bar high when it comes time to financial reporting. It doesn't matter how much the stock has fallen, if it trades at a premium and the earnings fall short of expectations, the stock will be at risk. Lululemon (LULU) exemplified this problem Monday morning when the retailer preannounced quarterly results. The numbers look solid, with revenue growth of about 25% year-over-year. But management revised its full year earnings-per-share guidance down to $4.22 to $4.27 a share, from $4.20 to $4.30 a share, a change of half a penny at the midpoint. That caused shares to slide more than 9% in premarket trading. Even though LULU is down about 30% from its 2021 high, the negative reaction to even the slightest change on earnings confirms there is still little-to-no room for error if the stock trades at a high multiple. Consistent with our angst over high-multiple tech stocks, we're selling some Microsoft and Nvidia . The former trades at around 23-times the next 12 months of earnings, while the latter trades at around 38-times. This compares to the S & P 500 's multiple of around 17-times. Additionally, we're cautious on Microsoft following recent comments by CEO Satya Nadella to CNBC, warning the next 2 years should be challenging for technology as businesses adjust to the normalization of demand after pandemic-related pull-forwards. A potential recession would further complicate the demand picture. With expenses growth at tech firms still not aligned with more muted revenue expectations, our trims today hedge us in the event earnings disappoint this season. This Microsoft sale will lock in a gain of more than 160% on stock first purchased in December 2017, and this Nvidia sale will lock in a gain of about 310% on shares first purchased in June 2019. (Jim Cramer's Charitable Trust is long NVDA, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A photo showing a computer circuit board in Vietnam.

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