If any sector could be said to have benefited following the arrival of COVID-19, Information Technology would fit the bill. If you have enjoyed the run, it might be prudent to take some of your profits off the table to invest elsewhere or to hold for another day.
As of late August, Information Technology is up over 34%. This follows a 2019 return of 50%, when our worries were whether the Fed would be raising rates or whether international markets would ever shine again. Over the 20 months since December, 2018, Information Technology has more than doubled. Its closest competitor was Consumer Discretionary which, at a 64% gain, wasn’t even close. Both sectors handily beat the 43% overall gain in the S&P 500.
You might be surprised to learn who is, and who is not, classified in Technology. Among the biggest companies by market value, Apple and Microsoft are in Technology. But Google’s parent Alphabet, Facebook and Netflix are not. They are classified in a new sector created in 2018 called Communication Services. This sector also includes Walt Disney who is rapidly becoming a tech-centric company in their bid to compete with other streaming services and find winning ways to distribute their vast library. Nor is Amazon in Information Technology. Rather it is a member of Consumer Discretionary and represents more than 50% of the value of that sector. These are among the best performing stocks this year and explains why Consumer Discretionary and Communications Services are the second and third best performing sectors.
Information Technology includes finance-related names like Visa and Mastercard whose command and control of electronic means of payment processing seems assured for now in an environment of growing digital consumerism. It includes Salesforce whose announced inclusion into the venerable Dow Jones Industrial Average and upbeat earnings reports led to a 50% gain in the span of days. It also includes companies like Nvidia, Intel, Cisco and Oracle, companies that build the infrastructure for digital communications and commerce whose demand skyrocketed during COVID-19. At the same time investors punished travel & tourism, hospitality and leisure companies, they rewarded those that supported our new physical distancing protocols.
None of this is to say that Information Technology is overvalued. It may or may not be. The fact is that Information Technology still makes more money than the other sectors. Forward earnings expectations over the last year for the S&P 500 have dropped nearly -13%, an expected outcome under the COVID-19 driven quarantine and economic contraction. Yet three sectors still expect positive earnings growth, and Information Technology leads them all at 8.5%. It is the same story with forward revenue expectations. Information Technology is second (behind Health Care) with 6.8% expected revenue growth.
Prospects for continued growth in Information Technology remain bright. But if you have enjoyed the run so far, you likely have a bigger allocation to Information Technology than if you were to start investing today. Now could be a good time to realize some gains, reduce your exposure and diversify.
The reader should not assume that an investment in the securities identified or described was or will be profitable. Any reference to a specific company does not constitute a recommendation to buy or sell that company
Disclosure: https://mitchcap.com/disclosure/
