The technology and communications services sectors are set to underperform, according to BofA Securities U.S. quantitative strategist Savita Subramanian. A dramatic 2000-style implosion is unlikely, but competitive profit growth will remain hard to find for the foreseeable future.
In Monday’s The U.S. equity investor’s guide to Tech stocks research report, Ms. Subramanian noted that technology stocks now less obscenely valued than in 2000. Then, the forward price-to-earnings ratio for technology stocks and communications services stocks was 53 times and 34.1 times respectively. Now, it’s 25.0 and 22.5.
Less extended valuations, along with high and improving profit margins, should help protect the technology and communications services stocks from catastrophic stock price declines. This is important for overall benchmark returns as both sectors contain some big winners from pandemic spending that have outsized effects on index performance. Communications services, for instance, includes Facebook Inc., Alphabet Inc., Netflix Inc. and video gaming developers Take Two Interactive Software Inc. and Activision Blizzard Inc.
These stocks are less frothy than in 1999, but valuations are not attractive relative to the S&P 500 as a whole. Earnings forecasts for technology and communications services are lower than the benchmark – energy, industrials, consumer discretionary, materials and financials are all expected to grow profits more quickly – and yet technology stocks trade at a premium valuation to the index.
There are other complications. Technology companies have been the main beneficiaries of globalization (the sector has the highest percentage of foreign revenue) and tax arbitrage (moving operations to low tax jurisdictions). Geopolitical tensions with China threaten to reverse globalization, at least in part, and the new G7 minimum corporate tax proposal would increase tax expenses in many cases.
The pandemic left very few companies able to generate growth in 2020 and early 2021 and most of them were technology-oriented. Investors were happy to pay high valuations for them because profits were cratering everywhere else.
The economic re-opening is now providing stiff competition in terms of companies with strong earnings growth and, while there will certainly be individual technology and communications services stocks with portfolio-enhancing success, investors can no longer buy blindly or widely in these sectors.
-- Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: I own Toronto-Dominion Bank shares in my TD brokerage account and in my Scotia iTrade account. Obviously, the average costs for the shares in each account are not identical. Question: If I sell some or all of the TD shares in the TD account, for capital gains purposes do I use the average cost that shows in the TD account, or do I use the average cost across both accounts?
Answer: You would need to calculate the average cost across all non-registered accounts in which you hold TD shares. Any TD shares held in registered accounts should be excluded from the calculation as they are not subject to capital gains tax.
“Under the ‘identical property’ rule in the Income Tax Act, where a taxpayer buys and sells several identical properties, such as common shares, at different prices over a period of time, the taxpayer has to calculate the average cost … to determine the adjusted cost base (ACB),” said Jamie Golombek, managing director, tax and estate planning, with CIBC Private Wealth Management.
Brokers typically provide “average cost” or “book value” figures for clients, but these numbers don’t apply when identical shares are held in multiple non-registered accounts, Mr. Golombek said.
The good news is that calculating the average cost should be relatively painless. Just add up the total cost of your TD shares (including trading commissions) and divide by the number of TD shares you own. If you were to then sell, say, 100 TD shares, you would multiply the average cost by 100 to determine the ACB of the shares sold. Next, subtract this from your sale proceeds (minus commissions) to determine your capital gain (or loss). Only half of capital gains are included in income for tax purposes.
One other thing to note: When you sell a portion of your shares, the average cost of the remaining shares does not change.
-- John Heinzl
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Compiled by Globe Investor Staff