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From 32% to 3.6%: A Tale of the TSX IT Index’s Year-to-Date Growth

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Despite the proximity and the overlap, there are several key differences between the U.S. and Canadian stock markets. One of the most pronounced differences is between the tech sectors of stock markets in the U.S. and Canada. Across the border, the tech sector dominates, especially in NASDAQ. Here in Canada, the financial sector is the heavyweight, and even though the energy sector has gotten slim over the years, it’s still a major force on the TSX.

Despite being relatively lightweight in the TSX, the tech sector was the primary engine behind the 2020 rapid recovery. Giants like Shopify expedited TSX’s after-crash recovery, and many tech stocks grew at an unprecedented rate. Many investors and speculators thought that stocks were growing too fast and too high for their own good, and it seems their fear was right.

The tech sector has finally run out of momentum and is one of the worst-performing sectors in 2021.

Tech sector year-to-date growth

S&P/TSX Capped Information Technology Index has only grown about 3.6% since the start of this year. It’s in stark contrast to 2020, when the sector had already grown about 32% between January and May, and that included the March crash. But the growth momentum ran out of gas somewhere around early February. Tech stocks started normalizing, and many are still sliding down or have become stagnant.

It might be too early to say whether the sector has properly normalized or if it will slip down some more before finally restarting its pre-pandemic growth. If it has reached the lowest point, now might be a good time to bag some previously overpriced tech stocks. They might still be overpriced but at least not that aggressively.

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An IT service management company

Converge Technology Solutions (TSX:CTS) is a relatively new IT company based in Toronto. It offers solutions in six different categories: cloud, cybersecurity, digital infrastructure, managed services, talent solutions, and advanced analytics. The company started trading on the TSX about three years ago, and the stock has grown 691% since then.

Its last 12-month growth is quite formidable as well (almost 490%). The best part is that, unlike several other tech stocks that couldn’t sustain the peak they reached after the pandemic recovery, CTS is still hovering at an all-time-high valuation. The stock is overpriced, but if you consider the growth, it’s not nearly as expensive (yet) as it could have been. The balance sheet is strong, and the company is growing its revenues at an incredible pace.

Foolish takeaway

The tech sector as a whole might have lost its momentum, but there are still stocks poised to reach new heights. If you are looking for relatively more attractive valuations, it would be a good idea to consider the stocks that are currently slipping down and grab them as soon as they hit rock bottom.

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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 Adam Othman owns shares of Shopify. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify and recommends the following options: long January 2023 $1140 calls on Shopify and short January 2023 $1160 calls on Shopify.

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