Tech, Utility and Banking Stocks: The Fight for Investor Focus
September 24, 2020
By Acuity Trading
Tech stocks… cha-ching! Yes, we’re talking about the phenomenal rally in the MAGA companies – Microsoft, Apple, Google parent Alphabet, and Amazon. Doesn’t take a genius to know that the pandemic-induced social isolation has increased our dependence on technology. However, these stocks are now being driven by FOMO more than anything else.
That’s not to say these companies did nothing to deserve the investor attention. Take Amazon for instance. Once again, a tech company has proved that “elephants can dance”! Despite being one of the world’s largest companies, Amazon exhibited the agility of a startup. Amazon was quick to adopt employee safety measures not just to keep operations going, but to ramp up deliveries of essentials, even as other firms crumbled under the pressure of supply chain disruptions. The company’s cloud computing business soared, as organizations supported remote teams and people turned to online options for entertainment.
While these trends supported tech stocks, the companies rose to the occasion. From solution providers (Zoom and Slack), to content providers (Netflix and Nvidia), to hardware manufacturers (Apple, Microsoft, and Dell), and even chipmakers (Intel and AMD), success wasn’t served to them on a plate. As these companies continue to innovate, markets continue to favour them, as illustrated by Acuity’s sentiment.
The question now is this: Does the fundamental growth in these companies warrant the extent to which their shares have spiked? Definitely not. Let’s look at Tesla. (Yes, it’s classified as a tech stock despite being an EV manufacturer, given its massive investment in technology for environment friendly engineering). In September 2019, the share price was less than $50. Last month, it was testing the $500 barrier! That’s jaw-dropping by any standards. Compared to this incredible feat, Tesla’s fundamentals are fairly shaky. That’s the reason the stock missed being included in the S&P 500 index, despite the Elon Musk-backed EV maker ticking off all the eligibility criteria checkboxes. DataTrek Research said the stock is “profoundly overvalued.”
Market sentiment for the tech behemoths remain largely positive, as shown by the Acuity Trading dashboard.
We can say the same for most tech stocks that have rallied during the pandemic. Tech stocks were hot, but are now overheated, overvalued, and overdue for a strong correction. Don’t panic just yet. Yes, there will be a correction. After all, the tech-laden Nasdaq index has gained more than 60% since March. But the correction will most likely be seen as a buying opportunity. Let’s face it. Social distancing is unlikely to disappear anytime soon and work from home seems to be a more permanent trend. These trends will continue to support tech stocks till at least 2022 and investors with long-term horizons will want these to be part of their portfolio.
Perhaps it’s time to update the monopoly board as tech stocks seem to have replaced utilities and banks as the new defensive asset class. That’s because the pandemic has got us thinking of technology as indispensable. In the pre-covid-19 era, this status was enjoyed by the utility or banking sectors, which is why these stocks found their way into defensive investor portfolios.
The bigger utilities had the advantage of highly predictable cash flows and generous dividends. In fact, these stocks were considered resilient to economic slowdowns. Even as consumer spending on other goods declined during a recession, they would continue spending on utilities. The pandemic squashed that logic!
Years of paying high dividends (65% on average) didn’t bode well for utilities, sending them scrambling for cash amid the coronavirus crisis. The S&P 500 Utilities has lost almost 7% in the last 52-week period, losing around 3% in the past one month.
Meanwhile, the S&P 500 Financials is down 12% in the last 52-week period, losing 2.5% in the past month. Banks have been severely hit by the near-zero interest rate set by the Fed and ECB and the need to take provisions of billions of dollars for future credit losses.
Even as the S&P 500 hit record highs, the solid run was driven by a bunch of tech stocks, with more than 60% of stocks in the index remaining in negative territory year to date. While investors may be tempted to add utilities and financials as they are undervalued, these stocks offer low growth even in good times.
Instead, this may be the right time to consider the erstwhile biggies of the tech sector. Shares of companies like IBM and Seagate have taken a beating year to date but these companies are strong, with huge amounts of cash in hand and are able to weather the storm.