I’m convinced that technology and stay-at-home stocks will outperform over the longer term. However, it is my belief that in the near-term (weeks or months), we may see some shift OUT of technology/stay-at-home names that have been leading the market. I believe that shift will push capital INTO quality value names, particularly those sporting sustainable (key word here!) dividends. Very recently, there has been at least some volatility appearing within the tech/stay-at-home stocks, and some positive moves on the value side. This may or may not be the beginning of such a shift. Whether now is the time or not, I remain convinced that such a shift is probable at some point soon. For this reason, we at ValueTrend have placed more emphasis on value and dividend names – not only in our Income Platform, but within our Equity Platform as well!
Here are my 4 main thoughts surrounding that potential:
- Fundamental reasons: Tech/stay-at-home is now at extreme valuations compared to value and/or dividend stocks. A few comparisons:
-MSFT forward PE 32X (disclosure: we hold MSFT), Amazon FPE 99X, Netflix FPE 78X, Shopify FPE 78X. Note that only MSFT has a dividend, and its small.
-Berkshire Hathaway (B) FPE 22X , Loblaws 16X FPE, Capital Power 18X FPE, Johnson & Jonson 19X FPE. (disclosure: we hold all 4 of these stocks). All but BRK.B pay dividends.
- Technical reasons: The Amazon chart shows the typical parabolic overbought pattern seen on many of the leading tech/ stay-at-home stocks. Do I really need to walk you through the chart and indicators to point out how this stock is parabolic and overdue a correction?
Meanwhile, many of the better quality value/ dividend stocks are showing basing patterns. Some are even beginning to break out! Capital Power’s chart is below (I own it personally and professionally via the VT Equity Platform). Do I really need to walk you through the technical attractiveness of the base breakout, hooking momentum indicators and the benefits of the 7% yield on this “boring” utility stock? Note: this is not a stock recommendation, do your own research on this or any stock mentioned in the blog. Guess what….. Stocks have risk and you can lose capital!
- Vaccine: Tech/stay at home growth is going to slow down over time. Currently, these stocks are discounting the massive neartermed growth after the COVID shut-downs in online shopping, work-at-home patterns, and home-based entertainment. True, there has been a significant shift by consumers and businesses to more at-home activities. Yes, that trend-shift is sound, and its going to last. However, assuming a vaccine is discovered soon and released (after realistic delays in distribution), the psychology of market participants (who look to the future) may change. Markets have built in enormous growth expectations for tech/stay-at-home stocks. Markets may soon turn their attention to a move by consumers and workers focusing at least some degree on getting back to outside work, shopping, and leisure activity. Money may be taken off the table in these overbought entities and enter into other sectors.
- Retired, yield-starved investors: Baby Boomers (of which I am one) make up the largest influence of invested capital through their pension plans, 401 K’s (RRSP’s), real estate and investment portfolios. With yields on “safe” assets like bonds and GIC’s being near-zero, these investors will seek out investments with income flows that meet or beat inflation. At ValueTrend, we have been seeing this shift by our 65-70 year old clients for the past 2 years. Now, with yields so very low, its going to be an even bigger shift. We’re seeing the ValueTrend Income Platform, which holds higher yielding stocks with well covered dividends, receive significant amounts of capital over the past year or so. A portfolio of quality utilities, banks, insurance and even select REIT’s will offer greater stability than stocks like Shopify and Zoom with little or no dividend income for an investor to fall back on.
Most individual investors make the mistake of thinking that the best time to invest in a sector is when they are high. While technically, that makes sense to a certain extent, we don’t want to buy into an overbought or overvalued market. Many of the stay-at-home stocks are clearly in that predicament.
The best time to invest in a sector is when valuations are low, and chart patterns show signs of a turnaround. Many of the value/dividend stock out there are showing such signs.
Do your homework. You may find a shift into value will reap benefits as we head into – what I believe will be – a rocky period coming into the US elections.
If you are following any technically attractive value stocks, share your thoughts. Remember, we’re all in this together!