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Five good reasons why tech stocks are crushing the market this year

Nasdaq is up 22%, Canada’s tech sector is up 77%. Peter Hodson looks at what’s going on in the tech world to make it a global standout

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Tech stocks are on a roll, and most market experts are saying the sector is in a bubble or, at least, overvalued. With the Nasdaq index up 22 per cent so far this year and mega-cap techs such as Amazon (71 per cent) up even more it is easy to pick on the sector, especially when you consider that the world is in a deep recession and the average stock is down about seven per cent for the year to date.

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The Canadian tech sector has been equally impressive: up 77 per cent this year, of course led by Shopify’s 179 per cent gain at the time of writing. So what’s going on in the tech world to make it the standout in almost all world markets? Let’s look at five possible reasons for its success.

Tech is where the growth is

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While the rest of the world hunkers down in a pandemic recession, tech companies continue to put up blistering growth numbers. We won’t go into specifics, but many companies are routinely reporting sales growth of 40 per cent, 50 per cent or more. Those specific tech companies that benefit from the COVID-19 lockdown are reporting even faster growth. With almost all other sectors, except perhaps gold, in a funk, investors are simply putting their money where they can continue to find growth. For now, that means almost all roads lead to technology.

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Tech companies were already online, so lockdown didn’t hurt them

As a blatant example, when was the last time you remember actually buying a software package that was on CD-ROM? Yeah, we can’t remember, either. The shift to the cloud had occurred long before COVID showed up, and technology companies have for years been practising remote-work, online sales and video conferences. The global shut down really did not have any impact on the way they conducted business, at all.

Fear of missing out (FOMO)

This has been discussed before, but let’s look at it from an investment manager’s perspective. Suppose you are a fund manager, and you thought — as many did — that tech stocks were overvalued in January. So you were under-weight the sector. Now, it is August, and your fund performance, versus the market, looks horrible. You have two choices: One, stick to your convictions, and if you are wrong, have a horrible year, performance-wise, get no bonus, and possibly get fired; Or two, buy some tech stocks to try to salvage your yearly performance and bonus, so you at least keep your cushy job. Since tech is becoming a bigger part of market indices (with growth), we are seeing a lot of fund managers starting to buy the sector, even if they don’t really want to.

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Short sellers have been forced to cover

Let’s face it, no one really likes short sellers. They are like those gamblers in Vegas who bet against the shooter in craps: just no fun at all for the majority of players. The shorts this year in the tech sector are getting crushed. Docusign (DOCU on Nasdaq), for example, is up 404 per cent in the past 52 weeks. There are 8.7 million shares shorted, and it must be a very painful experience watching that stock rise week after week. At some point, the pain becomes too much, and short sellers — even those convinced they are ‘right’ — start to cover their positions. This creates even more buying interest, and the shorted tech stocks can rise even more, which creates a fun up-cycle for those who are long the sector.

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The future will be run on tech

I own some Nvidia (NVDA on Nasdaq) and my joke to my kids is that, “when the robots finally take over the world, they will be running on Nvidia chips.” But I am only half-joking. Is there anyone in the world today that possibly thinks the world will have less technology 10 years from now? Or 20 years? Constant innovation, even beyond the commonly-mentioned augmented reality and autonomous driving, is going to continue to drive the need for technology. There are inventions and services and products that we can’t even think of yet that, no doubt, will be run on tech devices and software. Really long-term investors (think pension and endowment funds) are likely positioning themselves in the sector for multi-decades of growth.

Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals.

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