It’s a good time to be heavy in the U.S. tech names, but as the valuations rise and AI enthusiasm takes things to the next level, Canadian investors might wish to consider which names to take profits in and which names might be worth rotating into traditional, boring value names with hefty dividends.
Right now, the TSX Index is quite heavy on the value names that also pay generous and growing dividends. And while I wouldn’t start slashing U.S. tech exposure indiscriminately at a time like this, especially given the disparity between the colossal winners and the proven performers with steady earnings growth that are still down and out, I would look to pare any exposure in the names that are overheated.
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Parts of tech are becoming frothy
Maybe that means taking a tiny bit of profit off the table in the names that have started to look a bit on the parabolic side. Of course, trimming winners might mean missing out on the next leg higher. But, at the end of the day, I think that some parabolic movers are better positioned than others to hang onto their gains. In my humble opinion, many of the mega-cap stocks (think the Magnificent Seven) are still not wildly expensive.
Not when you consider the wide moats and the real earnings growth that’s being delivered. When it comes to overheated tech stocks that might be prime trim candidates, I speak of the semi stocks that have more than doubled in short order. Or perhaps the red-hot IPO that’s surged out of the gate. If you’re fine with taking on more risk and you see a high-multiple tech stock as still being undervalued relative to the opportunity on the table, perhaps hanging on is the better move.
Bank of Montreal
For investors who are growing uncomfortable with the increased volatility after a parabolic surge or for those who have an intrinsic value target that’s now far below the market price, trimming might be the move.
At this juncture, it might seem like it’s too late in the game to rotate into a Canadian bank stock. But I do think the group has staying power and a name like Bank of Montreal (TSX:BMO) stands out as a fantastic name that’s worth adding on strength.
It has momentum at its back and relative value in a market that could continue to reward Canada’s top financials as the benefits of AI and agents start to flow through the banking industry. Shares of BMO are starting to break out again, now hovering near $212 per share. The 17.6 times trailing price-to-earnings (P/E) still seems quite modest, at least in my view.
And with a 3.2% dividend yield, I think investors are getting paid a reasonable amount to wait as BMO gets serious about AI monetization and other technologies. The company recently appointed a head of digital assets and tokenization, a move that suggests BMO is every bit as tech-savvy as some of the fintech innovators out there.
With deep pockets and a willingness to spend on the next generation of tech, I find the slightly heftier multiple to be well worth paying. Beyond tech, BMO is making noise south of the border with its move into commercial banking in the western U.S. All considered, BMO is a premium name that still goes for cheap, and it’s perhaps a stealthier way to bet on the rise of tech.
