• Thu. Sep 22nd, 2022

What is a Technology Stock? – Morningstar

ByWikafever

Sep 21, 2022

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“We’re living in a digital age” is the mantra of two BBC comedians, Elis James and John Robins. Very much like politicians supporting economic growth, embracing technology is the 21st century’s no brainer – we’re all living in a digital age now. The rise in consumer technology has made shoppers’ lives easier and lowered transaction costs for companies. But this has made investing harder in some ways. During the boom, every stock wanted to be seen as tech. But if everything is digitally enabled, from precision missiles to our weekly grocery shop, how can we see the wood from the trees?  
Fortunately, classifying items is one of the great passions of the investment industry, as shown by current rush to define what’s ESG and what isn’t. As is happening in the sustainable field, there is some disagreement about methodology, but for investors knowing where products belong is useful even if the goalposts are shifting over time. What ways can investors find tech stocks?
One classification system is the Industry Classification Benchmark (ICB) classification system, which splits companies into industry/supersector/sector and subsector. FTSE Russell, a subsidiary of the London Stock Exchange Group, runs the ICB. Another is MSCI’s Global Industry Classification Standard (GICS). Morningstar divides stocks into cyclical, defensive and sensitive super sectors, with 145 industries – and tech belongs to the sensitive sector. “Technology” is a broad church though, including IT service providers, software and hardware companies, cybersecurity firms, etc. Within Morningstar Direct’s research portal, users can find 9,116 stocks listed in the UK – and over 1,000 of these are classed as technology.
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Want an easy shortcut? For many investors, the Nasdaq is synonymous with the multi-decade tech boom. Like the LSE, it gives its name to an index, a Wall Street exchange and is a company in its own right. Launched in 1971 with a value of 100, the Nasdaq Composite by early 2010 had passed the 2,000 points mark. In June 2020 year, the tech-dominated index made its first move above 10,000 points and hit an all-time high (so far) just above 16,000 points in November 2021. In 1999, the index rose its most in percentage terms, gaining 85%, and in 2020 – the lockdown year – jumped 43%. No wonder investors get excited. The Nasdaq 100 is a more concentrated version.
Nasdaq has become a byword for US tech but other industries are also included. All the familiar names are there, the biggest of which are Apple, Microsoft and Amazon. But non-tech companies like PepsiCo, Costco and Monster Energy companies also make the cut. Astute readers will notice that the top three looks remarkably like the S&P 500, the benchmark. This is a reflection of the dominance of tech mega-caps in the last decade, and also reveals the difficulty passive investors face when wanting non-tech exposure. It also points to another issue – that investors may struggle to find a weighting towards non-US tech. China has been an example of a country that has become associated with tech firms like Alibaba and Tencent, but volatility will put off some.
Morningstar’s Global Technology index has 988 holdings, but again it’s hard to escape Apple, which has a weighting of nearly 20%. US equities make up 75% of this index.
As the tech bull run unwinds after a decade or more of stunning gains and energy stocks rally, could we about to witness a change in sentiment among professionals and retail investors? According to Morningstar’s chief US market strategist Dave Sekera, US energy stocks are now overvalued and the sector is now marginally undervalued.
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IPOs across the world in the last few years have been heavily marketed with a “tech” flavour and attracted billions of investor dollars. The disappointments of Uber (UBER) – still below its IPO price of $45 – and Deliveroo (ROO) are just two examples of how tech buzz and reality are unhappy companions.
We could see a shift in emphasis among companies listing and how they present themselves to the wider world. A cursory look at most websites will find the words “digital” and “technology” in there, leading investors to wonder what the company actually does. Those words don’t have the pulling power any more, which is partly due to ubiquity of tech and investors’ desire to pursue the “next big thing”. Short-term market moves aside, investors have short memories – and the lure of finding the next Apple or Amazon remains strong. Perhaps, as the consumer tech revolution matures, investors will turn their attention elsewhere – but technology will be box office for some time to come.
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person’s sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard  is senior editor for Morningstar.co.uk

 
 
 

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