The US stock markets have done well with the barometer S&P 500 index achieving 27% return in 2021.
However, an index is a selection of stocks to represent the country’s overall stock performance and not all stocks have gone up by 27%.
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In particular, I observed some of the young and high growth tech stocks are running out of steam and have underwent heavy correction in the last few months of 2021. They have been outperforming for many years and maybe the time has come to take a rest? I am not sure but the momentum suggests that it is time to stay away and we have trimmed down quite a lot of tech exposure because of it.
3 examples of high growth tech stocks losing momentum
1) Sprout Social
The first example is Sprout Social (SPT), which I wrote about previously.
I bought it using the Quality Momentum Trading (QMT) strategy. Although it had a quick run up, the trend collapsed in the middle of Nov 2021 and I exited for a 15.4% return in 3 months as it triggered the sell rule.
2) DigitalOcean (DOCN)
DOCN is a cloud infrastructure provider and only IPO in Apr 2021. The share price rallied as high as 3x from its IPO price within a year! Momentum picked it up and I entered at $81.36 in Sep. I sold half the position in a rebalancing exercise at $105.22 and the remaining were sold at a loss when the trend finally broke down. Overall, it was a 20% gain.
3) Atlassian (TEAM)
TEAM is a project management software loved by the programmers. Bought in Sep at $371.16 and exited in Dec at $354.34 with a loss of 5.4%.
You can see that the correction started in late November for these stocks.
These were just 3 examples but you can find similar patterns for other high growth tech stocks too. Hence, it isn’t a company specific issue but a sector problem. The most cited reason is the increasing rate of inflation whereby such growth stocks will worth less in the future and the market is discounting it now.
I have observed that the QMT portfolio comprises stocks from traditional sectors such as energy, materials and industrials. Here are some examples of stocks with strong with momentum currently.
3 examples of traditional stocks gaining momentum
1) Builders FirstSource (BLDR)
Builders FirstSource is the largest U.S. supplier of building products. US is seeing a boom in home building especially during Covid whereby more people are choosing to live away from the city since they are working from home.
Builders FirstSource and Home Depot may sound similar but they are not really in the same business. Builders FirstSource focuses on a lot of lumber products which is the primary material for single- and multi-family residences. Home Depot on the other hand, is a hardware retail store, selling you tools and home interior stuff. Builders FirstSource is what you need when you are constructing a house and Home Depot is where you visit after your house is built. Both benefits from the rise in home building.
The momentum has been rising since Sep 2021 and there is no sell signal yet. We got into the stock at $73.23 in Nov, sitting on a 17% gain.
2) CF Industries (CF)
This is a company that is definitely not very much heard of to investors. They are the largest ammonia producer in the world!
So what?
Ammonia can be used to make into fertilizers as well as, wait for it, produce clean energy!
Specifically, we are referring to green ammonia. Here’s how CF Industries positioned themselves in the clean energy play:
Green hydrogen and ammonia are expected to be critical contributors to the world achieving net-zero carbon emissions by 2050. Industry experts project hydrogen will meet approximately 20% of the world’s energy need by 2050, up from less than 1% today. Ammonia, which is composed of three-parts hydrogen and one-part nitrogen, is a highly efficient transport and storage mechanism for hydrogen as well as a fuel in its own right.
Even Saudi Arabia is building the world’s largest green ammonia plant in the world, shifting away from their dependence on oil.
We bought CF Industries at $64.81 in Nov 2021 and are sitting on a 9% gain currently.
3) Veritiv (VRTV)
Veritiv is a Fortune 500 company and provides packaging and logistics, printing, publishing and supply chain management services. It is the largest packing distributor in North America and this is a business segment that they focused on building and have been selling away their printing and publishing segments.
They offer an extensive packaging solutions ranging from small food packaging to large motorcycle packaging. After years of losses, it managed to turnaround in FY2020 with a profit and quadrupled the profit in FY2021.
We bought Veritiv (VRTV) at $61.07 in Jul 2021. Trim half the position during rebalancing of the portfolio in Nov at $153.69, a 152% gain. We are still holding to the remaining half of the position.
Momentum is shifting to traditional sector stocks!
Tech stocks have done very well in the past few years but the good thing about momentum is that it is able to tell us when the wind is changing direction.
The wind has now shift to traditional boring sectors. If you believe in the stock market being a leading indicator, a full Covid recovery might come soon and the inflation threat might be a reality too.
This is the situation for now and we are not sure if the momentum will shift back to tech stocks. If so, the QMT strategy is designed to pick trending stocks and our QMT portfolio will follow suit.
p.s. if you like to manage a growing portfolio that lets you disregard the overall market sentiments by simply following a set of rules, join me at my next webinar to learn how the QMT strategy works.
