Semiconductor manufacturer NVIDIA Corp. was named “the smartest company in the world” by MIT Technology review in 2017 and, while I rarely discuss individual stocks, I wrote a full column about the company shortly thereafter. I don’t own the stock but I wished I did, until recently.
From July 2017 when I wrote the column, until November 11, 2021, NVIDIA stock jumped 721 per cent – an annualized return of 62.1 per cent. It has since fallen 27 per cent since, thanks in part to this week when shareholders endured a 7.6 per cent downdraft (to Thursday’s close).
NVIDIA remains uniquely positioned to benefit from the fastest-growing trends in the digital economy. Its graphics processing units (GPUs) are dominant in the gaming industry, and also in autos (particularly for self-driving cars that need to anticipate danger with cameras), cloud computing, and artificial intelligence and machine learning.
This week’s sell-off was caused by an earnings report that saw NVIDIA’s gross profit margin flatline at 66.5 per cent. The stock was hit hard despite a 53 per cent year-over-year increase in sales. Profits beat estimates by 8 per cent.
Over the past three years, earnings growth has averaged 48 per cent annually and consensus estimates point to continued profit growth above 40 per cent.
Why is a stock with a growth profile this strong down almost 30 per cent from its highs? We may be witnessing a broad re-rating of the technology sector – the related companies will continue to grow, but will be valued less by the market.
It feels ethically awkward to recognize this but technology stocks benefitted significantly from the pandemic. With much of the economy stalled due to quarantine, the number of companies with earnings growth strong enough to attract investors declined.
The large cap technology stocks that were able to maintain profit growth became more valuable because of this growth scarcity. [This does not, of course, include the numerous tech stocks without earnings that garnered significant speculative investor interest)
The MSCI World Information Technology Index trailing price to earnings ratio climbed from 23.7 times in late March 2020 to over 40 times in 2021 as investment piled in. NVIDIA’s price-to-earnings ratio went from 66 times trailing earnings at the end of March 2020 to over 100 times earnings by late 2021.
New, more economically sensitive market leadership has emerged since November 2021. The S&P 500 energy sector has outperformed NVIDIA by more than 50 percentage points, gold miners have outperformed by 47 percentage points and the agricultural products sector beat it by 43 percentage points.
The new leading sectors remain far more attractively valued than technology stocks. The World technology index’s PE ratio is now 31.2 times and NVIDIA’s is 62 times. For U.S. 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 suggesting that NVIDIA’s stock price will decline significantly form here - the growth outlook remains impressive. But although the pace of economic re-opening from COVID is uneven, there is no doubt that more sectors beyond technology are now able to generate sales profit growth. Tech stocks are expensive in valuation terms while cyclical sectors are much more attractive, setting the stage for more investor assets to shift out of tech and into the sectors now leading equity market performance.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Rob Carrick’s 2022 ETF Buyer’s Guide: Best Canadian equity funds
Every flaw in your portfolio will be magnified to larger-than-life dimensions when the next stock market downturn happens. Smart investors won’t wait. They’ll get out in front of the next market plunge by examining their holdings in a moment of relative calm. This brings us to the 2022 Globe and Mail ETF Buyer’s Guide, which rolls out at a time when stocks are taking a breather after a long surge from their pandemic lows. First up in the guide are exchange-traded funds that hold Canadian stocks.
Tip-toeing back to bonds already
Inflation is raging, interest rates are rising and bonds look like treacherous investment waters. Yet, there is growing chatter in investment circles that the time may be nearing for investors to increase their bond exposures. JPMorgan analysts, for instance, updated their view of prospective 10-year returns for a standard 60/40 equity/bonds portfolio this week and said the recent shakeout in asset prices lifted their expected returns significantly from a year ago. Could it be enough to dissuade investors from the TINA (there is no alternative) phenomenon that has at least partly driven the equity price boom as bond yields were floored in recent years? Mike Dolan of Reuters takes a look.
‘Few places to hide’: investors seek shelter as stocks, bonds fall together
Lockstep declines in bonds and stocks are sending investors into defensive products such as credit swaps, convertibles and even cash as they seek refuge from the market’s recent gyrations. Davide Barbuscia of Reuters reports.
David Rosenberg thinks inflation is close to peaking – and that there’s a way to profit from it
With inflation soaring to multiyear 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 strained, improvements in delivery times and declines in business costs, including shipping, suggest the peak of inflation is near. And for investors, that means an opportunity to make money in bonds. (On another front, here’s his latest warning about the troubles that lie ahead for the Canadian housing market.)
Another world? Virtual assets insulated from cooling risk appetite, for now
Global markets have had a rocky start to the year as the prospects of tighter monetary policy prompted investors to ditch risky assets – but the fast-growing world of “metaverse” investing has been running on its own timeline. Metaverse-related assets such as currencies that can be used in virtual worlds, and NFTs representing virtual land, took only a small hit as risk appetite dropped in January, while the broader market for digital goods has seen volumes surge. Elizabeth Howcroft of Reuters looks at the latest developments in this new investment frontier.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: Six dividend stocks that could thrive in an inflationary environment
Number Cruncher: How Canada’s financial stocks compare on safety and value metrics
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Thursday’s Insider Report: Company leaders are buying these three dividend stocks
Third Point sees more value in Amazon, likes some ‘old’ tech stocks
Research report: An update on how first-quarter TSX results have fared so far
Globe Advisor
Fund managers take shelter in cash as central bank fears shake markets
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Ask Globe Investor
Question: My wife and I will soon be converting our registered retirement savings plans into registered retirement income funds. Since we must cash out the required minimum percentage of the RRIF value each year, how should we decide which investments to sell? I’m also concerned that sell decisions will come with transaction fees, which will reduce the value of the account.
Answer: You don’t necessarily have to “cash out” any stocks 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 is equivalent to the minimum amount you are required to withdraw. This will avoid brokerage commissions but fulfill the government requirement to draw down a certain percentage of your RRIF. Withdrawals up to the required minimum are not subject to withholding tax, but amounts over that threshold will have some tax withheld. It’s therefore a good idea to keep some cash in your RRIF to cover possible withholding tax. 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.
--John Heinzl
What’s up in the days ahead
What has fund manager Dennis Mitchell been buying and selling of late? We’ll be finding out.
War and peace: World market themes for the week ahead
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Compiled by Globe Investor Staff