McMurtry Investment Report and Model Portfolios™

McMurtry Investment Report Newsletter – March 2021

What is going on with tech stocks?

The massive equity sector market rotation out of growth stocks into cyclicals continues. As of market close on March 5th, most tech stocks have fallen sharply from their 52-week highs as shown on the attached table below. This recent performance is significantly worse than the overall market returns shown by the US SPY ETF that emulates the S&P 500 Index, with the exceptions of Google, Oracle and Visa.

Higher interest rates reduce the present value of long- term cash flows for growth companies.This market rotation can be explained by the following factors:

Taking into account the recent very strong performance of the cyclical stocks, many investors feel it may be too late to rotate into these value stocks. Personally, I still feel we are in the early innings of a cyclical economic recovery with the vaccine rollout accelerating globally and continued stimulus packages still being provided. It is important to keep in mind the very long period of time when growth stocks outperformed value. More specifically financial stocks have only recently begun to outperform growth stocks and this trend is not likely to end soon. The global economy has enormous pent-up demand that is expected to be reflected in strong economic growth this year and next.

 

Differing from many other advisers, I am not recommending a mass liquidation of these tech stocks. These companies continue to provide the long- term growth opportunities that other sectors simply do not. However, this market is being led by a strong cyclical recovery in economic growth and consequently tech stocks will not perform as well as others in this cyclical recovery.

Conclusion

I am recommending a reduction in equity sector weight for the high- tech group to underweight the North American benchmark weights.


I am adding Oracle to both portfolios in the tech sector. The stock is much cheaper than many of its peers and is making considerable inroads in expanding its cloud presence.


Many high- tech companies including Facebook, Google and Netflix are all part of the Communications sector. This is a hybrid sector in that it contains telecommunication companies like Telus and BCE and diverse companies like Disney and Comcast that own theme parks and entertainment businesses.


I am maintaining my underweight in the Communications sector, but reducing it from last month as a result of the many other diverse companies in this sector and the strong performance of Google.

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