It’s no secret Q1 of 2021 was a bit of a bust for tech stocks, which after cleaning up last year got their comeuppance over February and March. What’s on tap for the sector over the next three months? Susan Schmidt of asset managers Aviva Investors thinks there may be a turnaround in the sector, especially for quality names.
Schmidt says the pandemic will again play a role in how the market turns, this time with an eye towards the opening up of economies as vaccines begin to take hold.
“I think there is a lot of attention towards that reopening trade [but] the question now is how much attention has been put there and is that trade already over?” said Schmidt, speaking on BNN Bloomberg on Thursday.
“Investors like to anticipate what’s going on, and what we’ve seen so far is that 2020 winners have been sold out of for more cyclical higher beta names. Now, that occasionally happens, and we do too much —in fact that’s frequently where the market overshoots itself when it moves from one positioning angle to another,” she said.
“It’s quite possible we’re seeing that, so we haven’t washed out tech entirely in fact we think that tech for us could be a position of opportunity. We’re looking at those companies carefully right now because they could be in oversold positions,” Schmidt said.
Technology stocks both in the US and Canada delivered big time in 2020, where the tech-heavy NASDAQ shrugged off the COVID-19 drop in February and March and went on to post a monster 43-per-cent gain for the year. That compared to the S&P 500’s return of 16 per cent.
Even better was the S&P/TSX Capped Information Technology Index which put on 53 per cent last year, compared to a wider S&P/TSX Composite Index that barely made it back above water, finishing up two per cent for 2020.
Even with its overall stellar results, however, the Canadian tech space was a mixed bag. Some pandemic-related plays did very well, like e-commerce company Shopify and supply chain software name Kinaxis, which delivered returns of 178 per cent and 80 per cent, respectively.
Others like stalwarts Constellation Software and Descartes Systems were reasonable successes and still others like OpenText and CGI had trouble making it back to even for 2020.
The return to growth and the re-opening of businesses should be good for a company like CGI, according to National Bank Financial analyst Richard Tse, who earlier this year labelled Canadian consulting and IT services giant CGI as one of his best bets in Tech for 2021.
Reviewing CGI’s most recent quarter in an update to clients in January, Tse called the stock a compelling name with an attractive risk-to-reward profile.
“We believe CGI is moving back to its previous growth trajectory (both organic and inorganic) – the strong results seem to support that view as we look ahead. We continue to believe the IT Services sector will be one of the segments in tech to benefit meaningfully exiting the pandemic, particularly for vendors that can pivot their service offerings into areas of demand – much like CGI is doing,” Tse wrote.
Another Canadian favourite, BlackBerry, may have trouble repeating in the second quarter the drama that occurred in the Q1 2021, which might not be a bad thing. The stock tripled in the space of a couple of weeks as the former mobile phone maker got swept up in the retail investor furor over video game retailer GameStop.
BlackBerry’s share price went from $10 to above $30 in a matter of days before falling almost as quickly as it rose. Now the stock is trying to hang onto more meagre gains after posting lacklustre quarterly results.
But where the tech tide floated almost all boats in 2021, Schmidt says the current second quarter should be more selective, with less emphasis on sector-wide plays.
“It’s a broad range of sectors that we’re looking at as you move into this kind of market rotation,” Schmidt said. “What we’re seeing now is what we think is the opportunity for potential earnings growth across various different companies for specific reasons.”
“This is no longer, in our belief, a market that’s just going to go up by sector because of multiple expansion. Instead, it really is becoming that stock picker’s market for the rest of 2021. You need to pay attention to the underlying company that you own and the reason that its earnings might exceed expectations,” she said.
“We do think that there are opportunities in select names — banks are always a favourite for us. It’s an area where if the economy gets better banks will do better, and we don’t think that’s been fully incorporated into all of the stock prices yet,” Schmidt said.
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