This year’s rout in the technology sector has been fast and furious, but not as deep as some past selloffs, observes Jack Bowers, a leading mutual fund specialist and editor of Fidelity Insight & Monitor.
Between 12/10/21 and 6/30/22, Fidelity Select Technology (FSPTX) lost 35.5%, versus 28.8% for its slightly-less-risky MSCI benchmark. (The S&P 500 retreated 19.0% over the same period.)
Things could have been worse if not for the 2017 GICS sector reclassification, which “de-FANGed” the sector by deleting Facebook (META), now called Meta Platforms; Amazon (AMZN); Netflix (NFLX); and Google (GOOGL), now named Alphabet, while at the same time adding financial transaction processors — such as VISA (V) and MasterCard (MA) and information service firms like ADP (ADP) and Intuit (INTU).
The technology sector’s robust profitability has also been a key factor. Unlike the past, most firms are expected to maintain profitability even as the economy slows. And in recent years those profits have been used to reward shareholders.
Not only are many companies paying dividends (the sector’s dividend yield is up to roughly 0.75%, and it accounts for about 16% of the S&P 500’s total dividend payouts), but they are also spending far more on stock buybacks than any other sector.
Apple (AAPL), for example, has repurchased enough stock to shrink its outstanding shares from 26.5 billion to 16.2 billion over the last 10 years, which for shareholders has been equivalent to getting a 5% cash dividend each year and reinvesting it in additional shares.
Notably, Warren Buffet (who may not understand technology as deeply as he understands insurance) does not seem to have any doubts that Apple stock is a solid long-term investment. In his letter to shareholders he applauded Apple’s stock repurchase program.
That’s a very different view than the mass media, which frequently casts doubt on the validity of stock repurchase programs, while also leaving readers with the impression that technology firms are about to be regulated and/or taxed into oblivion due to anti-competitive behaviors and insufficient data privacy practices.
In reality, the situation is not so grim. The clampdown on data privacy is hurting communication services, but isn’t having much impact within the technology group.
Separately, many of the proposed remedies for “anti-competitive” behavior are not expected to have much impact on earnings. In some cases they might even lead to business model changes that boost revenue growth.
Meanwhile, chip makers and other highly profitable technology firms are likely poised for solid long-term growth as automation and artificial intelligence play a greater role in the global economy. Perhaps that is why the GICS powers-that-be are now planning to reverse the dumbing-down of the sector that occurred in 2017.
Sometime early next year, financial transaction processors will be deleted from the technology group and moved to the financial sector. Ditto for information services firms, which will move to the industrials sector. As a result of all this, the technology sector will lose about 11% of its capitalization in 2023 — though it will still dominate the S&P 500 (which currently has a technology weighting of about 27%).
Within this once-again redefined technology group, Apple and Microsoft (MSFT) will carry a combined weighting of about 50%, with a wide range of chipmakers, hardware manufacturers and software companies making up the rest.
We’ve been running our model portfolios with a technology under-weight over the last 18 months, mainly because rising inflation and interest rates are bad news for high-priced stock groups.
But on the assumption that inflation is now near its peak and the worst of the growth-stock selloff is behind us, our model portfolio trades — which include increasing our stake in Fidelity Select Technology from 15% to 20% — are moving us back closer to roughly a market weighting.
The economy may be slowing, but the technology sector as a whole has potential to maintain its profitability and growth better than the general economy. To remain under-weight at this stage could mean a greater risk of lagging the S&P 500 going forward.
