Monday saw the TSX getting drawn into a global selloff in equities. With the pandemic looking set to continue for the foreseeable future, investors are beginning to rethink valuations and weigh up growth potential. The disconnect between the stock markets and the economy looks as though it is beginning to close. While this correction will be healthy in the longer term, the near-term risks are palpable.
With the Dow Jones down by almost 1,000 points and the S&P/TSX Composite Index shedding around 400 points, a market selloff was undoubtedly underway. The correction came as coronavirus cases continue to tick up and a staggered pandemic looms. The implications are hitting investors all at once. Further lockdowns could be forthcoming, economic recovery could be painfully drawn out, and many stocks have become overvalued.
Four defiant TSX tech stocks
Last year saw cannabis stocks dominating the TSX30. While there was still a bit of green in the nation’s top-performing stocks, 2020’s list was weighted more toward tech growth. Monday’s pullback briefly opened up some value opportunities in exciting names. However, at least four of the hottest tech stocks on the TSX were not among them.
Shopify (TSX:SHOP)(NYSE:SHOP) was up 3.7% Monday, defying a broader selloff. Ballard Power Systems was itself up 3.4%. Constellation Software was up by around 1%, as was Kinaxis. The good news about these gains is that this quartet of top-performing Canadian tech stocks isn’t just resistant to pandemic selloffs, but actually improves during such selloffs. While this could be bad news for a recovery, it’s certainly a near-term plus.
Long-term risk and a frothy near-term market
Of course, the potential for another pullback in tech stocks still remains. These four names have been growing at rates that may prove unsustainable. Ballard has gained an impressive 202% in the last 12 months. That’s even better performance than Shopify’s 191% gains. Kinaxis has gained 117% in the last 12 months. In the meantime, Constellation is up 14.6% year over year.
The pandemic is like lighter fluid for tech stocks. This partly explains why this week’s pandemic driven market selloff has not impacted these exciting names. Another reason could be that these stocks are driving so much positive momentum that they are fueling their own bull runs independently of broader market action. With so much froth in the markets, though, picking the right tech stocks is a challenge.
The key with growth stocks is matching upside potential with valuations. Investors should know their entry and exit points. For instance, for all its bluster, Shopify has actually lost 9.4% in the last four weeks. This suggests that the boost afforded by the pandemic is wearing off. Investors may want to begin looking around for the Next Big Thing, such as near-Earth satellite tech and the 5G boom.
Investors may wish to think outside the box. Names like Maxar Technologies and Xebec Adsorption. These stocks could have plentiful upside in the mid- to long-term. Maxar is emerging as a key stock for 5G investing, and with its NASA partnership it has friends in high places (literally). Xebec is one for the gas bulls, with a niche spin on the clean energy space.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Constellation Software, Shopify, and Shopify. The Motley Fool recommends KINAXIS INC and MAXAR TECHNOLOGIES LTD.