Semiconductor maker NVIDIA Corp. was named the “world’s smartest company” by MIT Technology magazine in 2017, and while I rarely discuss individual stocks, I wrote a full column about the company shortly after. I don’t own the stock, but wish I did, until recently.
From July 2017, when I wrote the column, through November 11, 2021, NVIDIA stock jumped 721%, or an annualized return of 62.1%. It has since fallen 27% since, thanks in part to this week when shareholders suffered a 7.6% drop (through Thursday’s close).
NVIDIA remains in a unique position to benefit from the fastest growing trends in the digital economy. Its graphics processing units (GPUs) are dominant in the gaming industry, as well as automotive (especially for self-driving cars that must anticipate danger with cameras), cloud computing, artificial intelligence, and technology. machine learning.
This week’s selloff was caused by an earnings report that saw NVIDIA’s gross profit margin stagnate at 66.5%. The stock was hit hard despite a 53% year-over-year sales increase. Earnings exceeded estimates by 8%.
Over the past three years, earnings growth has averaged 48% per year and consensus estimates point to continued earnings growth above 40%.
Why is a stock with such a strong growth profile down nearly 30% from its highs? We may be seeing a broad reassessment of the tech sector – related companies will continue to grow, but will be less valued by the market.
It seems ethically inconvenient to acknowledge this, but tech stocks have largely benefited from the pandemic. With much of the economy stalled due to quarantine, the number of companies with strong enough earnings growth to attract investors has dwindled.
Large-cap tech stocks that have been able to sustain earnings growth have become more valuable due to this scarcity of growth.[Thisdoesnotofcourseincludethenumerousnon-earningstechstocksthatgarneredsignificantspeculativeinvestorinterest)[Celan’inclutpasbiensûrlesnombreusesactionstechnologiquessansbénéficesquiontsuscitéunintérêtspéculatifimportantdesinvestisseurs)[Thisdoesnotofcourseincludethenumeroustechstockswithoutearningsthatgarneredsignificantspeculativeinvestorinterest)
The price-to-earnings ratio of the MSCI World Information Technology Index has risen from 23.7 times at the end of March 2020 to more than 40 times in 2021, as investments have accumulated. NVIDIA’s price-to-earnings ratio has grown from 66 times earnings at the end of March 2020 to over 100 times earnings by the end of 2021.
New, more economically sensitive market leadership has emerged since November 2021. The S&P 500 energy sector outperformed NVIDIA by more than 50 percentage points, gold mining outperformed by 47 points percentage and the agricultural products sector beat it by 43 percentage points.
The new flagship sectors retain much more attractive valuations than technology stocks. The PE ratio of the global technology index is now 31.2 times and that of NVIDIA is 62 times. For US energy stocks, it’s 17.0 times, and gold and agricultural stocks are trading at PEs of 21.0 and 15.4 times, respectively.
I’m not saying NVIDIA’s stock price will drop significantly here – growth prospects remain impressive. But while the pace of economic reopening from COVID is uneven, there is no doubt that more sectors beyond technology are now in a position to generate sales profit growth. Tech stocks are expensive in terms of valuation, while cyclical sectors are much more attractive, paving the way for more assets from investors shifting away from tech to sectors that are now leading performance stock markets.
— Scott Barlow, Globe and Mail Market Strategist
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Rob Carrick’s 2022 ETF Buyer’s Guide: Best Canadian Equity Funds
Every flaw in your portfolio will be amplified to larger than life dimensions during the next market downturn. Smart investors won’t wait. They will exit ahead of the next market dip reviewing their holdings in a moment of relative calm. That brings us to The Globe and Mail’s 2022 ETF Buyers’ Guide, which comes at a time when stocks are taking a breather after a long surge from their pandemic lows. First in the guide are exchange-traded funds that hold Canadian stocks.
Tiptoe back to obligations already
Inflation is raging, interest rates are rising, and bonds look like treacherous investment waters. Yet, there is growing talk in investment circles that the time is approaching for investors to increase their exposure to bonds. Analysts at JPMorgan, for example, this week updated their view of potential 10-year returns for a standard 60/40 stock/bond portfolio and said the recent fall in asset prices had boosted their returns significantly. expected compared to a year ago. Could that be enough to deter investors from the TINA phenomenon (there is no alternative) that has at least partly driven stock prices soaring while bond yields have bottomed out in recent years? Reuters’ Mike Dolan takes a look.
‘Few places to hide’: Investors seek shelter as stocks and bonds fall together
Gradual declines in bonds and equities are pushing investors into defensive products such as credit swaps, convertibles and even cash as they seek refuge from recent market swings. Reporting by Davide Barbuscia of Reuters.
David Rosenberg thinks inflation is about to peak – and there’s a way to profit from it
As inflation hits multi-year highs in several parts of the world, all eyes are on global supply chains to gauge whether or not relief is coming. David Rosenberg says that while supply chains are still tight, improving delivery times and falling business costs, including shipping, suggest the peak of inflation is near. And for investors, that means an opportunity to make money with bonds. (On another front, here is his final warning about the problems ahead in the Canadian housing market.)
Another world? Virtual assets sheltered from cooling risk appetite, for now
Global markets had a rocky start to the year as the prospect of tighter monetary policy prompted investors to ditch risky assets – but the rapidly growing world of ‘metaverse’ investing followed its own calendar. Metaverse-related assets, such as currencies that can be used in virtual worlds and NFTs representing virtual lands, suffered only a slight hit as risk appetite fell in January, while the market broader digital goods sector has seen its volumes increase. Reuters’ Elizabeth Howcroft reviews the latest developments in this new investment frontier.
Others (for subscribers)
The TSX’s Highest Paying Stocks, Plus Risk Data
Number Cruncher: Six dividend-paying stocks that could thrive in an inflationary environment
Number Cruncher: How Canadian Financial Stocks Compare in Safety and Value
Friday analyst upgrades and downgrades
Thursday analyst upgrades and downgrades
Thursday’s insider report: CEOs are buying these three dividend-paying stocks
Third Point sees more value in Amazon, likes some ‘old’ tech stocks
Research Report: An Update on How TSX Q1 Earnings Have Fared So Far
Fund managers take refuge in cash as central bank fears rattle markets
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Question: My wife and I will soon be converting our Registered Retirement Savings Plans to Registered Retirement Income Funds. Since we must cash out the required minimum percentage of the value of the RRIF each year, how should we decide which investments to sell? I’m also concerned that selling decisions will come with transaction fees, which will reduce the value of the account.
To respond: You don’t necessarily have to “cash in” shares to make a RRIF withdrawal. If you don’t need the money, you could ask your broker to make an in-kind withdrawal of shares with a market value equal to the minimum amount you must withdraw. This will avoid brokerage commissions, but meet the government requirement to withdraw a certain percentage from your RRIF. Withdrawals up to the required minimum are not subject to withholding tax, but amounts above this threshold will be subject to withholding tax. So it’s a good idea to keep some money in your RRIF to cover any tax withholding. Keep in mind that the entire withdrawal will be added to your annual income, so there may be additional tax to pay when you file your return.
What’s up in the coming days
What has fund manager Dennis Mitchell been buying and selling lately? We will find out.
War and Peace: Global Market Themes for the Week Ahead
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Compiled by Globe Investor staff