Has the rotation begun?

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.
Conclusion

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!

 

quote-teal

8 Comments

  • Hi Keith
    What do you think of Canadian energy and bank stocks? Price in these sectors still under a declining 30 ma on weekly chart and below declining spx price line so probably too early to buy in as maybe they still have another leg lower.

    Thoughts?
    Thanks.

    Reply
    • Hi Marry
      Yes, they are still both entrenched in the base phase. I look at the XEG and ZEB as benchmarks for those sectors. Both would need to break out of the base. Probably the banks would be ok given their dividends and slightly better upwards trajectory during the base. The forward PE’s are low on the banks, but that may be due to their outlook. See my Canada predictions blog–clearly, I am not the only investor worried about the Canadian economy (Banks are often the flag that signals the economic future). Plus, interest rates at this level makes for low profitability. So I’m not a raving bank fan on either side of the border.

      Reply
    • Mike…assume you mean Kraft listed in USA
      Yes, very technically attractive–we are examining it ourselves–needs fundamental catalyst to continue, but chart shows base and downtrend broken. We don’t own it yet, but it is on the radar of possible buys…

      Reply
    • If you like the fundamentals and think its a safe bet, its worth considering. Personally I’d prefer buying on a breakout.Its in a base and not moving yet–again, that’s fine if you feel it has enough fundamental value to warrant an eventual move. But at this time it looks like a flat pattern.

      Reply
  • The chart for SBC follows closely with that of ZEB over the last few years. It holds the big six banks.
    I like it for the very high dividend. Do you think it will stay in line with the banks meaning a fairly safe dividend. I try to manage the cash flow of my dividends and don’t worry much of anything else.

    Reply
    • Ron- we have examined the Canadian banks from a fundamental perspective and do feel that the outlook (subject to change!) is fine regarding their ability to sustain dividends. We hold a bank ETF in our Income Platform for this reason. However…The low interest environment and potential for loan defaults over the coming year or so may suggest lower likelihood of any dividend increases. And certainly one wants to keep an eye on banks that are more leveraged to higher risk areas like Western Bank. But, overall, an ETF is likely to maintain its dividend. I see little chance of share price upside over the next year – unless something meaningful changes their profit outlook…so we have avoided Cdn banks in our equity platform – despite our comfort of holding the bank ETF in our income platform.

      Reply

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