Some investors are getting increasingly worried about the outlook for technology and big growth stocks after a massive rally that has pushed the Nasdaq Composite index to record highs despite the coronavirus-inflicted economic damage.
Few can complain about the performance of the S&P 500 Growth Index, whose components range from Netflix Inc. to medical device maker ResMed Inc. and is up more than 10 per cent for the year to date, while the broad S&P 500 remains roughly flat over the same time. Instead, investors say the popularity of tech and growth stocks at a time of global economic uncertainty has left their valuations stretched and primed them for a decline.
“Watch for Nasdaq volatility to be compressed as risk is priced out with common sense,” said Sebastien Galy, a senior macro strategist at Nordea Asset Management. “The clock is ticking, significant prudence is warranted.”
The S&P 500 beat the technology-heavy Nasdaq Composite for a fourth straight session on Wednesday, a feat scored only twice since Wall Street launched its massive recovery last March.
Over all, 74 per cent of global fund managers are long tech stocks, making it the most-crowded trade in the multidecade history of the Bank of America Merrill Fund Manager survey.
Such lopsided trades often result in subsequent underperformance, a Reuters analysis found. The “best short is tech stocks given positioning and stretched performance,” analysts at the firm said in a report.
Further economic shutdowns in California, which has seen a surge in coronavirus cases, could also weigh on tech and growth stocks, Spreadex analyst Connor Campbell said.
“California is specifically a tech haven, so this is going to have a disproportionate effect on tech stocks,” Mr. Campbell says. “That is the home of American tech, if that spreads further, if lockdown restrictions get tighter in California, then this will eventually get a knock-on effect on those big tech firms.”
An increase in inflation-adjusted interest rates should benefit value stocks at the expense of popular companies such as Amazon.com Inc., Apple Inc. and Google-parent Alphabet Inc., billionaire investor Bill Gross said.
“Value stocks, versus growth stocks, should be an investor’s preference in the near-term future,” Mr. Gross wrote.
-David Randall, Reuters
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Stocks to ponder
Richards Packaging Income Fund (RPI-UN-T) is North America’s third largest packaging distributor. The Mississauga, Ontario-based fund has sales and distribution centres, and manufacturing plants located across North America. On May 4, the Fund reported stellar financial results for the first-quarter with strong demand hand sanitizers and disinfectants boosting its revenue. Read Jennifer Dowty’s full analysis here. (For Globe subs)
Goodfood Market Corp. (FOOD-T) is a Quebec-based company produces and delivers fresh meal kits and groceries purchased on its website from its six production facilities located across the country. Thanks to the COVID lockdown, this is turning out to be a record-breaking year for Goodfood, with multiple milestones reached. Its share price has roughly doubled in value, year to date. But can the positive price action continue? Jennifer Dowty has this interview with the CEO. (For Globe subs)
Shares of uranium producer Cameco Corp. (CCO-TSX) have risen from their mid-March lows, but is there any further upside? A higher uranium price would certainly help. The big news of late is that Cameco won a decision last month against the Canada Revenue Agency. There is a huge piece of change at stake. That and the future of nuclear power will be key. Read this take from the Contra Guys here. (For Globe subs)
How free-trading apps can be good for young investors
Young investors have been doing some questionable things with the new free stock-trading apps that have surged in popularity during the pandemic. Trading is so cheap and easy with these apps, like Robinhood and Wealthsimple Trade, that it almost becomes a game. But according to Rob Carrick, there is a smart way forward: Use them to build a super-cheap balanced-ETF portfolio. (for everyone)
What lies ahead for Wall Street?
Everyone knows corporate earnings will be miserable this quarter. What really matters for stock prices, though, are the prospects for next year and subsequent years as the world moves past the new coronavirus. Ian McGugan reports. (For Globe subs)
The lowdown on glamour stocks vs value stocks
The trend toward glamour, such as high tech stocks, and away from value, which favoured firms with software-related business, was building before this year’s COVID-19 crash. Norman Rothery looks at why the gap between them won’t last. (For Globe subs)
Others (for subscribers)
Wednesday’s Insider Report: Chairman invests nearly $500,000 in this REIT yielding over 7%
Tuesday’s Insider Report: Director tops up his position in Canadian bank stock
Number Cruncher: Seven consumer staples stocks powering the way through COVID-19
Others (for everyone)
Ask Globe Investor
Question: My view is that the markets are hugely underestimating the dire economic and social consequences of the pandemic. I am de-risking my portfolio. I have a couple of questions.
1. Do you have a view of RioCan? It is well-run and looks undervalued, but the risks are great.
2. Any views on Emerging Markets? I have XEM, which has a lot of China/Taiwan and Korea, but also much more dubious holdings in India and Russia. Best wishes.
Answer: RioCan (REI.UN-T) was the largest REIT in Canada for many years and the king of the shopping mall operators. It was a recommendation of my Income Investor newsletter for years, but we sold (at a nice profit) when it became apparent on-line shopping was starting to steal market share from brick and mortar retailers.
The trust has been aggressively diversifying its business and the shares traded in a fairly narrow range in recent years, until they fell off a cliff in March. As I write, they are down 42.6 per cent from their 52-week high, which may be an overcorrection.
The trust reported good first-quarter results and said it is in “good financial health with a strong balance sheet, ample liquidity, staggered debt maturities and multiple sources of financing combined with a large unencumbered asset pool”.
The distribution has been maintained at $0.12 a month, which is a positive sign since several other REITs have cut payments. At the time of writing, the yield was over 9 per cent.
That’s a very attractive payout, perhaps too much so. At this level, buying units would not be a derisking tactic. It may be a smart move over the longer term, but when you see a 9 per cent yield it means there are caution lights flashing.
XEM is the trading symbol for the iShares MSCI Emerging Markets Index ETF. It also trades in New York as EEM. As the name suggests the fund holds a portfolio of stocks from Emerging Markets including the countries you mention plus Brazil, South Africa, Thailand, etc.
As of the time of writing, it is down 10 per cent year to date. The five-year average annual total return to the end of May was 1.93 per cent - not impressive when related to the risk factor.
I suggest you need to do some rethinking if you really want to reduce portfolio risk.
What’s up in the days ahead
David Berman explores the disconnected markets: while the broad indexes remain firm, U.S. and Canadian bank stocks indicate there’s more pain ahead for the economy.
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Compiled by Globe Investor Staff