As we continue our theme of generating income in today’s market, it’s important to recognize how investors have been inundated with a stream of “hot tech fads” in the financial news. Stories often tell of a new industry or some eye-catching topic that generates excitement.
But there are some less popular “legacy” technology companies that should be getting all the attention right now. These blue-chip firms remade themselves and are experiencing a much smoother ascent in value without much acclaim.
While they lack the financial media appeal of flashier names, they trade with reasonable price-to-earnings ratios, pay growing dividends, are buying back shares, and have some of the most bullish charts so far this year. For income investors especially, this rotation to the “legacy” technology stocks is a pleasant surprise as it affords investors a tech-related dividend yield exceeding that of the S&P 500.
Many of the former leading tech companies have spent years acquiring cutting-edge businesses, winding down old products and services, and rapidly transforming to subscription revenue models (which fund buybacks and dividend hikes). We're also seeing a steady increase of fund flows into these companies with little fanfare.
Remember, worldwide technology spending is expected to jump 8.4% this year, exceeding $4 trillion for the first time ever. That type of capital expenditure will likely continue to drive outperformance in these types of tech stocks.
With that in mind, we wanted to provide a shortlist of examples, along with year-to-date returns and current dividend yields to illustrate the point. Additionally, it can still be argued these stocks are significantly under-owned and it’s just the beginning of a long runway of sustained accumulation.
*Cornerstone Financial Services, LLC owns IBM directly in managed accounts and may own them indirectly through ETF investments as well. Daniel Milan does not own any personally.
What may even be more impressive with these stocks is how smoothly they sailed through the extremely volatile month of May. The old Wall Street phrase is to “follow the money,” and right now it’s heading towards blue-chip legacy stocks.
Takeaways from the Swift Bear-to-Bull Transformation
Now that we’re able to look back with enough time on the impressive rebound that equities have staged after experiencing the fastest plunge into bear market territory in history, we can reaffirm some important investment lessons. For context, the three major indices featured in the table below comprise the S&P Composite 1500 index, which represents approximately 90% of the total U.S. equity market.
As you can see, despite performing better during the bear market, large cap stocks significantly lagged their mid- and small-cap counterparts over the two periods captured above. From February 19, 2020, through May 24, 2021, the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600 posted total returns, respectively, of 26.65%, 31.26%, and 35.25%. Additionally, the chart makes clear that sector performance can vary widely by market capitalization, sometimes extremely (see consumer discretionary, consumer staples, energy, and health care).
We point this out to highlight a couple of key takeaways.
One is that when looking to play a rebound in the stock market, especially following a bear market, begin by identifying the hardest-hit areas. These may have the potential to appreciate the most during the early stages of a rebound, like what happened with consumer discretionary and energy.
A second takeaway is the importance of investment diversity across both sectors and market capitalization (i.e., size). Market rotation is constant, and nobody knows what the future holds. Thus, the best way to capture value when yesterday’s losers become today’s winners is to already hold a diverse array of assets.
Bounce Ahead from “Big Money” Buys?
As our readers know, not too long ago we said to expect more market volatility and that growth stocks could rev up. More recently, we're starting to see signs the volatility will subside, and the bigger message is this – under the surface, stocks are starting to juice up. Remember, when institutional buyers show up, it's time to start your engine.
For example, reviewing MAPSignals’ trusty Big Money Index (BMI), which tracks institutional investor activity, we see how buyers are arriving in force:
A closer look for clarity:
We're seeing the same pattern with exchange traded fund (ETF) activity:
Looking closer, the lack of selling is quite pronounced:
The outsized green shoots of buying in both charts indicate continued bullish behavior by the market’s biggest participants. As such, we can reasonably expect more upside in the weeks ahead.
It's also important to note what kinds of stocks are being bought up. As of now, we’re seeing the most buying in “reopen” sectors like real estate, financials, industrials, and energy. Still, there is burgeoning buying taking place with some growth stocks too, so the love isn’t lost on the typical highfliers yet.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial Services, CoreCap Investments, and CoreCap Advisors are separate and unafﬁliated entities.