Valuation of certain names starting to look favourable, says PM
While tech stocks may have taken a nose-dive last year after skyrocketing in 2021, there are favourable selections again for those who want some prudent weighting to their portfolios.
“When good quality stocks go on sale, just like good quality anything in life, you want to be a buyer,” Claudio Chisani, the principal of Chisani Wealth, portfolio manager with Credential Securities, and investor advisor with BlueShore Financial in Vancouver, told Wealth Professional.
“We were fortunate to become extremely underweight in late 2021, and that gave us a little bit of leeway. So, we added semiconductors and premium names, such as Apple, Microsoft, and Google, and I continue to maintain the same percentage at the beginning of the year.
“I see the market correcting and offering me even more of a discount on the same names, so I’m tempted to add to it. But, at the current level, I would not necessarily be prepared to allocate disproportionately more to technology than other sectors just because I’m aware of the volatility the sector generates with a very few exceptions.”
Chisani noted that there will always be volatility in the technology sector – though the NASDAQ was down 32% in 2022 and now is up about 14% year-to-date this year, so the sector has made some recovery. “We just don’t know if this is a technical bounce or a sign of things to come in a more sustained recovery,” he said, noting that he’d seen something similar in 2000 and 2009.
“It’s easy to get carried away and invite a lot of speculation when it comes to tech stock, but I think we culminated with this in November 2021, when tech trading hit stratospheric levels. Then we followed with the reality check in 2022. Right now, we are in a holding pattern where profitability, or the recalibration of profits and profit margins and earnings have to match the valuation of the stocks, and every sector is different.”
Chisani noted that the economic backdrop for the sector is not as favourable as in 2022 with central bank tightening, increased pressure on households, and more credit card defaults, and many families and businesses have already brought forward their tech capital investment. So, that could be a potential headwind for the industry, especially since it’s a discretionary expenditure.
But, some industry leaders are still doing well. Meta, for instance, is up 70% year-to-date. Apple, Google, and Microsoft have also increased from 20% to 25%. So, while it’s not back at the 2021 level, the tech sector is benefiting those who have invested in technology since the start of 2023. So, he recommended investing in areas that have sustained growth and potential for the future. That includes cybersecurity, artificial intelligence, and semiconductors.
“We don’t know if we’re going to go into a mild or more prolonged recession, but your best-in-class technology stocks will always command a premium and will probably be less volatile,” Chisani said, citing Apple, Google, and Microsoft again as well as Salesforce. He called it the Cinderella story since the stock was unfavourably treated by the market, but when its earnings came in, the management had done well and it now looks as if it has a bright future. “It’s a company that’s turned around in very short order – from being disliked by the analysts. Now, it’s one of the darlings of 2023.”
He recommended advisors choose stable companies with bigger names and not put money into speculative technology. But, he cautioned again, “I’d maintain a prudent weighting to technology rather than throw caution to the wind and venture into the sector a lot more.”
Chisani is also impressed how some of the tech names have been able to cut their costs and focus on efficiencies in 2023. “Whenever you have a business contraction around the world, it creates even better companies,” said Chisani. “So, the silver lining here is that, if we are prepared to experience some volatility, it will create better businesses for the future.”