It might be a good idea for investors to forget about technology stocks for a few years, according to BofA Securities U.S. quantitative strategist Savita Subramanian. The tailwinds that once benefiting the sector have now become headwinds, and yet technology stocks remain expensive and overweighted by institutional investors despite the recent sell-off.
Ms. Subramanian cited high levels of market liquidity chasing high growth stocks, ultra-low interest rates, slow economic growth (which drove investment assets from cyclical sectors to tech) and globalization among the biggest drivers of the technology sector’s outperformance over the past decade.
These trends are all set to reverse as central banks tighten monetary policy and re-shoring, a popular topic among executives during recent analyst conference calls, begins a partial reversal of globalization. The potential for new regulation represents another risk for the sector.
The strategist notes that after the 1990s tech bubble implosion, “it took several years for Tech to bottom, but only after many companies went away, those that were left consolidated capacity, shored up capital, and most importantly, after investors had given up on the sector.”
Ms. Subramanian writes that institutional clients continue to request stock screens to identify value in technology, a sign that sentiment remains too bullish and a bottom for the sector has likely not been found yet. In addition, the forward price to earnings ratio of the Russell 1000 Growth Index – which is dominated by technology stocks - remains well above the historical average compared with the Russell 1000 Value Index, implying that further downside for growth stocks remains.
The strategist sees one important exception to her ‘avoid technology’ advice and that it automation. Historically, the strong wage growth the U.S. has experienced has led to spending on automation, productivity and efficiency. Companies like Rockwell Automation Inc. and selected software providers focusing on labour-intensive industries may be worth a second look.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Freehold Royalties Ltd. (FRU-T) For income investors, this security may represent a defensive way to play the energy rally. The stock offers investors an attractive dividend yield of 5.9 per cent combined with a forecast price return of 24 per cent for a potential total return of 30 per cent over the next year, writes Jennifer Dowty.
Exchange Income Corp. (EIF-T) On June 7, the share price closed at a record high on high volume. This stock has rewarded shareholders with both price appreciation and regular monthly income with an attractive dividend yield, which currently stands at 5 per cent, says Ms. Dowty.
Nautilus Inc. (NLS-N) Shifts in consumer behaviour benefited a number of companies over the course of the pandemic: Zoom, Tesla, Pinduoduo, CrowdStrike and Peloton all prospered, to name a few in a variety of sectors. Another that bulked up substantially was Nautilus. The stock price soared from a prepandemic level of about US$6.50 to just over US$30. Alas, it has since atrophied, as have some of the other names; Nautilus currently trades around US$2.45. The Contra Guy examine its investing proposition.
The Rundown
Bay Street’s big chill sets in as share sales crater, sapping fees from investment banks
One of Bay Street’s best-known revenue sources is quickly evaporating, with the total value of share sales plummeting 57 per cent so far in 2022 amid a global market sell-off and fears of economic stagnation. Tim Kiladze takes a look.
Bank of Canada blunders will bring a housing market crunch
This grievous misreading by the central banks is now costing many Canadians dearly, especially those with variable rate mortgages or home equity lines of credit, says Gordon Pape.
Others (for subscribers)
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: CEO invests over $800,000 in this beaten-down consumer stock
Tuesday’s Insider Report: Director invests almost $300,000 in this lagging energy stock
Crypto meltdown is wake-up call for many, including U.S. Congress
Others (for everyone)
The early birds betting bitcoin’s bottoming out
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Ask Globe Investor
Question The other day I bought 50 shares of Topaz Energy Corp. (TPZ-T) with a “market order.” At the time, the price was quoted at $23 a share. However, my transaction history shows that I paid $23.03. It’s not the first time something like this has happened. Am I getting ripped off?
Answer: Nothing nefarious is going on. When you enter a market order for a stock, you’re telling your broker to buy the shares at the best available price. However, this is not necessarily the same as the last trade price, which was $23 in Topaz Energy’s case. When you entered your market order, evidently the lowest “ask” price – that is, what a seller was willing to accept – had risen to $23.03, so that is the price at which your order was “filled.”
These sorts of price changes are especially common with stocks that have relatively low trading volumes. To avoid surprises, look up the bid and ask for quotes from your broker before you enter an order. If the highest bid is, say, $51.50 a share and the lowest ask is $51.55, a market buy order would be executed at $51.55 (assuming there are enough shares on offer at that price to fill your order). A market sell order, on the other hand, would be filled at $51.50.
Another option is to use a “limit order” when you buy (or sell) a stock. This lets you specify the highest (or lowest) price you will accept. But in that case, you have to be prepared that your order might not get filled if the price doesn’t hit your target.
-- John Heinzl
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Compiled by Globe Investor Staff