Technology Stocks – when to get in again!

Making decisions about when to top up (and get back in) during brief panic episodes is difficult. Deep down we know we’re supposed to ‘do the opposite’ but fear gets in the way.  This is why some excellent fund managers are so much better at looking after someone else’s money than their own (and why a smart doctor goes to see another doctor if they’re not well).

One of my own best experiences was in October of ’87.  I was managing US equities for the investment division of a large insurance company.  The Crash happened while I was on vacation in Europe, and I was completely unaware of the mayhem in markets (we didn’t carry around cellphones back then).  Seeing how cheap some stocks I’ve wanted to own were all of a sudden (but were too expensive to buy before the meltdown), I started buying with a frenzy.  My boss was shocked (wanted to fire me) but a year later I was given another couple of hundred million dollars to manage – the performance of my portfolio beat the third party ‘expert’ managers by a long shot.

It isn’t necessarily time to jump back into the most battered segment of the market, but it is always a good time to be thinking about it rationally rather than emotionally.  And it might even be a good time for the newbie to ‘wade in’ and average down as stocks get cheaper.

Rather than dwell on individual stocks worth watching – I’ll use a couple of exchange traded funds (ETF’s) by way of example (randomly selected) – one Canadian and one U.S.

The Canadian ETF is the  ISHARES SP TSX CAPPED INFO TECH IDX ETF (symbol XIT on the Toronto Stock Exchange). It’s top five holdings aren’t surprising.  They include Shopify, Constellation Software, CGI and Open Text.  All are the darlings of the skinny collection of publicly traded tech stocks in Canada.  The top five in fact account for 85% of the index fund.  I already mentioned in a prior post that I’d rather own a Methanex than Shopify, but at some point it’s worth considering wading in now that Shopify has managed to report a 4th Quarter profit (of 1 penny a share).

As the price of the ETF tumbles (the fundamentals for these companies are less sensitive to the coronavirus, since they’re not as susceptible to supply chain issues), their valuations become more sensible again.  The battering has more to do with a change in investor sentiment – growth just isn’t worth as much when people are scared.  One concern is the huge weight in Shopify in particular (nearly 30%), but remember I’m using this fund as a example and not a recommendation necessarily.

The U.S. based ETF is SPDR NYSE Technology ETF (symbol XNTK). It’s top 10 list of holdings includes Shopify also (not nearly as much) but it also owns names you’d expect such as Tesla, Netflix and AMD – among its 36 different holdings.

The XIT is down (as I type this) by about 15% from its high, while SNTK is down almost 17%.

The question is when do you step up?  There’s no science to this part of the decision – generally experience helps – I eyeball the stock chart (a longer term one) and based on some understanding of historical valuations buried in my aging gray cells make a judgement.  For the Canadian ETF I’d get my feet wet (before diving in) at $25, and for the U.S. ETF it would be $70.  I might be early, but better early than never.  For individual stocks I’d go through the same exercise, but I’d dig a bit deeper into their fundamentals (improving, growth trajectory, competitive environment, vulnerabilities etc.)

GOOD LUCK!