Advisory intelligence: Why investors sold large-cap technology stocks

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During the first quarter of 2020, as the reality of the Covid-19 pandemic dawned on investors, outflows in the technology sector spiked significantly, compared with all other sectors.

The healthcare sector was the only industry to experience inflows, unsurprisingly, but the technology sector saw outflows of more than $25 bn – more than any other sector in the S&P 500 – according to analysis of sector fund flows for the first quarter among Nasdaq IR Intelligence’s client base.

What’s more surprising is that investors were selling off large-cap technology stocks. The value change across large-cap technology stocks in the first quarter was $72.1 bn, according to analysis of Nasdaq’s client base. Small-cap technology stocks also saw a significant decrease in value, of $235 mn, while mid-caps actually saw an increase of $6.2 mn.

‘It’s evident that institutional investors had been a big source of supply across the first quarter, especially once the volatility started,’ says Lauren Elkin, senior technology analyst at Nasdaq IR Intelligence. ‘It was clear that large-cap technology stocks had been a target for selling. It speaks to the performance and profits being there. In this environment where there were significant losses across the board, portfolio managers didn’t have many options for chasing gains. They may look to sell the names where profit already exists and then when they look to deploy capital again, they’ll move back in at a better valuation.’

Analysts examined the risk and reward profile of the technology sector, relative to the other 10 sectors in the S&P 500, during the first quarters of 2019 and 2020 to examine sell-off. During the first quarter of 2019, the technology sector offered the second-highest median daily return (second only to energy) while maintaining a competitive level of daily volatility of 1.93 percent.

During the first quarter of 2020, the sector provided a negative median return of -0.04 percent, which was still the third-best median sector return. Volatility in the sector increased significantly, to 4.72 percent, causing a drop in the risk/reward profile that’s unparalleled across the other sectors in the S&P 500 during the same time. 

The technology sector’s weighting in the S&P 500 increased from 21 percent to 25 percent between Q1 2019 and Q1 2020. ‘As information technology represents such a large portion of the pie and offers such a relatively attractive return per level of risk, it is fair to assume that alpha generation is contingent on equal or greater exposure to the sector,’ Nasdaq’s analysts write.

Nasdaq’s analysts also conducted a year-on-year examination of market changes. Between Q1 2019 and Q1 2020, only four categories increased in size. Three of those increased modestly, but for technology companies failing within the 75th percentile in size, there was a 43 percent change, a ‘substantial’ change according to Nasdaq’s analysts.

‘Across the small and mid-cap technology stocks, we saw some institutional demand, specifically from growth investors,’ Elkin says. ‘What we’re thinking here is that investors could be looking to deploy capital and move off the sidelines. Some of the best opportunities might be in the small and mid-cap space, where there might be better valuations given the recent liquidity concerns.’

This analysis of the technology sector’s performance during the first quarter can help issuers understand what caused the volatility in their stock long before the 13F filings are released, Elkin says. Given that 13F filings are still only released 90 days after trading has occurred, they’re of limited use in interpreting the volatility that defined the markets during March and April, whereas Elkin suggests that Nasdaq’s ability to analyze data from more than 2,000 global clients generates real-time insights for issuers and IR teams specifically.