- Three reasons why a massive correction in technology could be on the horizon in 2021
- The best-performing sector during one period often becomes the worst during the next
- IBM is old school and could offer stability
- DELL would survive and thrive during a market correction in the sector
- Time to lower exposure to the high-flying tech stocks- Take the money and run
Technology has changed the world. Over my six decades on this earth, I have witnessed the most incredible advances in history in science, communications, entertainment, and all aspects of daily life. Today, we carry around smartphones that are powerful computers. Wide-ranging applications have replaced many other products and services, including maps, cameras, calculators, libraries, and others.
The global pandemic highlighted the significant wonders of technology as it allowed people to work from home, keep in touch with friends, family, and work contacts, shop, and do many other activities that would never be possible in the 1960s through the turn of this century. The virus also turbocharged the leading technology companies’ growth and earnings, pushing some market caps way past the $1 trillion level.
The world’s wealthiest person is now Jeff Bezos, with a net worth over an incredible $182 billion. His Amazon.com (AMZN) began as a bookseller and flourished into a world-leading online e-commerce merchant. The growth of technology and the value of its leaders have been nothing short of amazing.
However, companies have experienced an exponential growth rate that will be more than a challenge to sustain over the coming years. While technological advances will continue to change and simplify our lives, the shares’ trajectory is likely to level off or turn lower. Gravity in the stock market can be a powerful force. There are many examples of how today’s skyrocketing stocks often become tomorrow’s losers throughout history.
If the technology sector experiences a substantial correction in 2021 and beyond, two companies that have not experienced the same exponential share price appreciation could be a safe harbor.
International Business Machines Corporation (IBM) and Dell Technologies Inc. (DELL) are likely to hold their value even if the rest of the technology sector suffers a significant share price adjustment over the coming months and years.
Three reasons why a massive correction in technology could be on the horizon in 2021
Gravity can be a powerful force in markets. In late 2017, Bitcoin’s price reached a high of over $20,000 per token on a frenzy of buying. One year later, in December 2018, digital token fell to a low of $3,120.
We may look back at the price action in technology stocks from March through early September as a period of, as Alan Greenspan once said, “irrational exuberance.” If 2021 brings a correction to the tech sector, it would not be the first time. The dot-com bubble in the stock market came after excessive speculation in internet-related companies from 1995 to 2004.
We could see a correction because of bipartisan agreement in the US and Europe that the leading technology companies have far too much power. Market caps and cash hordes have grown to dizzying levels with discourages competition. Moreover, the control of data makes the companies more powerful than governments. We could see a significant legislative initiative to limit and reduce their influence, leading to falling profits and share prices.
Another factor affecting earnings is increasing corporate and individual tax rates on those who earn over $400,000 per year. President-elect Biden pledged that taxes would move substantially higher under his administration, which will cause earnings to decline.
Finally, valuations have reached unsustainable levels if taxes and regulations are going to weigh on earnings. After a massive rally in 2020, we could see share prices suffer a substantial correction in 2021 and beyond.
The best-performing sector during one period often becomes the worst during the next
Picking tops and bottoms in markets is often a fool’s game, as they tend to rise far above logical levels and fall below rational prices. However, over the long-term, markets are rational as the cure for high prices is higher prices and for low prices is low prices. When the price of a stock or asset rises above its intrinsic value, it eventually corrects.
Therefore, the highest-flying assets over one period often become the worst-performers over the next. We witnessed that phenomenon in Bitcoin after it reached over $20,000 in 2017 and fell to below $3,300 one year later. Only recently, in late 2020, is the digital currency threatening to challenge the high. In March, Bitcoin’s price reached a higher low of $4210.
In the world of technology stocks, the rally has been more than impressive.
As the chart of the Invesco QQQ Trust (QQQ) shows, it exploded from a low of $164.93 in March to a high of $303.50 in early September, a rise of over 84%. At just over the $290 level at the end of last week, the QQQ remained not far below the early September high. QQQ’s top holdings include many of the leading technology companies, including:
Many of these companies will be targets in a changing environment for taxation and regulation.
Even if the technology sector suffers a substantial correction in 2021 and beyond, innovation will continue. When it comes to investing, the safest place in technology could be in some of the old-school members of the sector that have not kept pace with the high-flyers.
IBM is old school and could offer stability
International Business Machines Corporation (IBM) was a technology innovator long before technology was fashionable. The company dates back over a century to 1911, when it was known as Computing-Tabulating-Recording Company. It changed its’ name to IBM in 1924. IBM provides integrated solutions and services worldwide.
At $116.94 per share at the end of last week, the market cap was around the $104.2 billion level. While many technology companies do not pay dividends, IBM’s $6.52 dividend amounts to a 5.58% yield. IBM has been consistently profitable and has met or beat consensus EPS estimates over the past four quarters.
Source: Yahoo Finance
The chart shows that the current projections for Q4 are for earnings of $1.78 per share. The company reported EPS of $2.58 in Q3.
As the chart shows, IBM shares recovered from a low of $90.56 in March to a high of $135.50 per share in early October, or 49.6%. At the $116.94 level at the end of last week, the stock was just above the middle of its trading range. IBM has underperformed the rest of the technology sector since March.
However, the company is likely to outperform the rest of the sector during a corrective period in the coming months and years, given its long history of stability, earnings, and a rational valuation. A survey of sixteen analysts on Yahoo Finance has an average price target of $137.13 for IBM shares, with projections ranging from $115 to $165. Even if the overall market were to decline substantially, IBM would likely retain far more value than many of the other tech sector members.
DELL would survive and thrive during a market correction in the sector
Dell Technologies Inc. (DELL) designs, develops, manufactures, sells, and supports technology hardware, software, and service solutions worldwide. Dell has been around since 1984; it changed its name in August 2016 from Denali Holding Inc.
At $68.34 at the end of last week, DELL had a market cap of around $51 billion. The company has a steady earnings record over the past four quarters.
Source: Yahoo Finance
The chart shows that DELL beat analyst EPS projections over the past three of four quarters. While it missed in Q1 2020, it reported $2.00 compared to estimates of $2.02. Analysts currently expect EPS of $1.39 in Q4; DELL reported $1.92 in Q3 compared to estimates of $1.39.
Since the March low, DELL outperformed the QQQ as the share price rose from $25.51 to $71.45 or over 180%. At $68.34 at the end of last week, the shares were not far below the recent high.
DELL is a different kind of technology company compared with many of the FAANG stocks that could find themselves in the crosshairs of regulators and government leaders over the coming months and years. DELL’s business model is likely to help the company outperform many technology sector members if a tech wreck is on the horizon.
A survey of eighteen analysts on Yahoo Finance has an average price target of $72.28 for DELL shares, with projections ranging from $60 to $85. Like IBM, DELL may suffer a bit as corporate taxes rise, but a tighter regulatory environment would not likely target DELL’s business.
Time to lower exposure to the high-flying tech stocks- Take the money and run
It may be an excellent time to consider taking profits on some of the high-flying tech stocks in your portfolio going into 2021. The new administration is likely to use the bipartisan agreement about the dangers of the rising power and influence of the tech sector leaders to usher in a new era of regulations that impede earnings.
IBM and DELL are two companies that have been around for decades or a century in IBM’s case. Both fly under the radar when it comes to regulations and should continue to thrive even as corporate taxes rise.
Even if their share prices fall during a tech wreck, IBM and DELL are likely to outperform many of the other sector members as they will not face the same scrutiny that appears to be on the horizon for some of the high-flyers.
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IBM shares were trading at $120.09 per share on Monday afternoon, up $3.15 (+2.69%). Year-to-date, IBM has declined -5.71%, versus a 12.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
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