As we round out another dismal month in the markets, investors won’t mind seeing June in the rearview mirror. Notably, the technology sector has had a poor month, with the tech-heavy NASDAQ Index looking at a 7.5 per cent drop in June to add to its already-large losses in 2022.
But if you’re looking for a bright side to all this negativity, investors might be able to take solace in the fact that the market’s hollowing out of the tech sector has made some names look much more attractive.
Which ones, though? Portfolio manager Jack Janasiewicz says if you’re buying, steer clear of companies without earnings and stick with the Big Tech names that are pulling in the profits on a quarterly basis, since those are the ones likely to stand out during economically challenging times.
“When you talk about tech I think you have to split it into different groups in terms of what we would consider to be concept capital and profit-less tech and, obviously those are going to be tougher to rebound in here,” said Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, speaking on BNN Bloomberg on Wednesday.
“But you still have a lot of these big cap tech names that are still going to grow [and] this is where you get a lot of those fat margins,” he said. “And so, when we’re looking out over the next couple of quarters — and certainly margin pressure is going to be one of the bigger issues out there — the one place that still has plenty of resiliency is still going to be some of those big cap tech names.”
“After you’ve had that multiple compression in this space, maybe this becomes the new defensive segment for the second half of the year that gives you a little bit of upside to that growth story,” Janasiewicz said.
The pullback in tech has definitely been both across the board and yet lopsided, as the market continues to punish small cap stocks to a greater extent. In Canada, the gap is evident in the contrast between the broad-based S&P/TSX Composite Index, which is down about ten per cent year-to-date and buoyed by strong performers in the energy sector, versus the S&P/TSX Venture Composite Index, which is composed of smaller and younger companies whose positive earnings are sometimes still years away. Year-to-date, the Venture Composite is down over 33 per cent.
As for Canadian tech, the story is a depressing one, as names like Shopify, Nuvei and Lightspeed Commerce have all gone for huge losses. Shopify, for instance, was once the darling of the Canadian investment scene and for a while had the largest market cap among publicly traded Canadian stocks, beating out perennial top dog Royal Bank. Now, after losing around 80 per cent of its value in the last seven months, the race isn’t even close: RY sits with a market cap of $175 billion while SHOP is down to about $57 billion.
That’s not to say some of the last half-year’s pain in tech hasn’t been due, as the sector reaped huge rewards over the 2020 and 2021 years as investors took to tech as a COVID-friendly play. And the market’s rotations this year into more safe and defensive spaces has also been a reasonable one considering the economic uncertainties surrounding events such as the war in Ukraine, rising inflation and continuing COVID fallout.
Nevertheless, even if economic growth does slow — as has been not only predicted but encouraged through central banks’ actions to tame inflation — Janasiewicz thinks the major meltdown of the first half of 2022 has already taken much of that economic damage into account, meaning there’s likely upside from where we’re at now. On that line, Janasiewicz says his firm has started rotating away from commodity exposure and towards dipping into the tech space.
“I think when you when you look at what’s already discounted in and we start to think about things peak to trough and your traditional garden variety recessions, you get a 25 per cent correction in the marketplace. So, we’ve already discounted that sort of run-of-the-mill recession.”
“What we’re hearing a lot about now is that earnings estimates need to be revised lower. The trick there, though, I think is maybe the market itself has already discounted that expectations of earnings and so maybe that’s the little bit of the disconnect here,” he said. “Yes, analysts still need to probably bring down some of those estimates but the market really isn’t those analysts and the market has already done some of that.”
As for tech, Janasiewicz said, “It’s been beaten up [but] that secular growth story I don’t think is going away. The valuations at these levels are significantly cheaper than what we saw coming into the beginning of the year.”