After a turbulent time on the markets last year, tech stocks are still a go-to for momentum generation. But one indication that the tide might be turning for Big Tech came last Friday night. Some investors might have missed it. Following the suspension of accounts held by U.S. president Donald Trump, Twitter’s stock was down 2% in after-hours trading. As of Monday, the social media platform was down 11% in five days of trading.
Tech stocks facing a challenging year
Electorates vote at the ballot boxes. Investors, however, vote with their wallets. It’s been noted before that the market could be jittery about a shift in the politics of our nearest neighbour. From multinational corporations to banks to oil producers, a sea-change wasn’t necessarily welcome in all quarters. The fact that a certain breed of tech stocks is vulnerable to political upheaval suggests that corporate concerns could continue to stir market sentiment.
Sadly, political machinations aren’t the only social factor that could turn against Big Tech. Look at last year’s strong correlation between vaccine breakthroughs and the market performance of work-from-home tech stocks. Shopify in particular emerged as a bellwether stock for the socially distanced tech space. The e-commerce star sold off by around 10% on more than one occasion, coinciding with positive news on the vaccine front.
However, there is more than one thesis for buying tech stocks. There’s the momentum play, meaning that the company itself is less relevant than its share price trend. Then there’s the industrial angle, which focuses on the digitalization of society and thus a longer-term growth trend. And then there’s the quality play, which takes each business on a case-by-case basis. As with momentum investing, the quality investor is less focused per se on tech as a trend.
Not just “technically” a tech stock
But let’s focus on that second play: the industrial investing strategy. Names like Descartes Systems Group (TSX:DSG)(NASDAQ:DSGX) fit the bill. In fact, Descartes is a prime example of a lower-risk tech stock focused on business optimization. This is very much a tech investor’s tech stock, rather than some red-hot, hyped-up ticker, or a company that just happens to be lumped into the tech category.
With a P/B of 5.7 and P/E in the 100 range, Descartes is overvalued. But shareholder returns could hit almost 200% by 2026. This leaves the low-risk investor in something of a quandary. But the price trend over the last 12 months shows slow-and-steady recovery with a beta not much higher than market volatility. A correction does not appear to be imminent. Indeed, Descartes could have 20% upside given the right conditions.
Stocks such as Descartes fit a tech investing strategy but with less risk attached. They satisfy a tech thesis by covering themes that relate to a broad panoply of digital investing themes and aren’t just lumped into this asset band by a technicality — such as a food stock that just happens to operate via an app. With attractive price targets and a moderate buy consensus, Descartes could be a multi-year capital gains generator.
