As of the end of September, technology stocks, ex Facebook, Alphabet and Amazon, represented 5.1% and 21.90% of the Canadian and US equity market respectively. Facebook, Alphabet Series C and A and Amazon represented a combined total of 7.7% of the S&P 500 Index as of October 4.
Given a total market weight of just under 30% of the US market these stocks constitute the largest single group.
The largest technology stocks by market weight are Microsoft, Apple, Amazon, Facebook and Alphabet Series C and A. Their combined weights total 15.94% of the market and more than half of the total technology weight.
This sector is characterized as growth as a result of their focus on rapid growth in revenues and earnings and their higher than average market valuations.
Recently there was some market rotation out of these growth stocks into more attractively priced value ones like materials, energy and financials. In my opinion in order for this market rotation into value sectors to continue there are several factors that need to happen. First there must be some resolution of the China / US trade war and global economic growth needs to resume its uptrend before value stocks really start to shine once again.
The technology sector has experienced rapid growth in many areas over the years including the introduction of the internet, digital advertising replacing traditional advertising and online buying becoming a major force in the retail industry. Automation, robotics and artificial intelligence are other examples created from this industry with the purpose of lowering overall business operating costs by replacing manpower with computers.
While there are many long – term negative implications of less jobs on our society as a whole, corporations and governments continue to spend a large proportion of their capital expenditures on technology and innovation to make themselves more competitive.
There are many facets of this industry that include digital advertising, cybersecurity, enterprise cloud computing, artificial intelligence, semiconductor technology, hardware and software development and the introduction of wireless 5G technology.
Both Microsoft and Amazon are involved in enterprise cloud computing. Facebook and Alphabet dominate the digital advertising area, while Cisco, Nokia and Ericsson are involved in the new 5G technology. Amazon and Google are also involved in artificial intelligence. Smaller players like Kinaxis are forces to be reckoned with in supply management software, while Shopify has built a large presence in small to mid sized businesses selling their products and services online.
Many of the older companies such as Apple, Microsoft and Cisco needed to reinvent themselves in order to compete in this fast- moving industry. While Apple continues to derive most of their revenues from hardware of the iPhone, the company has successfully been able to create a large and growing revenue source from recurring services’ revenues from new apps allowing the user to do a multitude of new tasks.
Both Elizabeth Warren and Bernie Saunders in addition to many Republicans have expressed a desire to stop the growth of many of these companies.
While it is too early to predict the final outcome of these discussions, I have decided to remove Facebook from the Growth portfolio in the Communication Services sector.
I will continue to hold Alphabet with all its growth prospects in many areas including artificial intelligence.
Stock picking becomes even more important in choosing which companies to buy in this sector. I do not advise buying a high- tech index, preferring to focus on the companies with the better prospects that are well capitalized.
Market leaders like Apple, Microsoft, Amazon, Cisco and Visa will continue being strong performers with their superior managements and industry vision. Canadian companies like Kinaxis and Open Text will also complement these US tech holdings. While I still like Shopify as a company, I find the shares too expensive at current levels taking into account the lack of actual earnings.
Peter McMurtry, BCom, CFA
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