The US stock technology sector has a poor start to the year. BMO suggests: relying on this "selective strategy" can still achieve profits against the trend

According to the Zhitong Finance APP, Brian G. Belski, Chief Investment Strategist at BMO Capital Markets, published a research report stating that the technology sector has underperformed the S&P 500 index by 5.5%, marking the worst start to the year since the financial crisis and the worst two-month performance in this bull market.

Data from the firm shows that from January to February 2023, the excess return of the technology sector relative to the S&P 500 index was 6.2%. In 2024, this excess return is projected to be 3.5%. However, in the first two months of this year, the technology sector lagged the broader market by 5.5%.

Nevertheless, Belski noted that the equal-weighted technology sector has only declined by 2.62% year-to-date, compared to a 5% decline in the weighted sector. This indicates that the current plunge "is not as bad as it seems on the surface" and may highlight the importance of stock selection, which is particularly evident compared to two years ago.

"The 3.5% excess return of the equal-weighted sector is almost a mirror image of the underperformance level for 2023-2024, and it is also one of the best relative performances in the last two months since 2007," he added.

Additionally, stocks within the technology sector that have performed well continue to maintain nearly double-digit average gains. Over 46% of technology stocks have outperformed the broader market, while this proportion is 40% for 2024. At the same time, the gap between outperformers and underperformers is also widening.

Belski also pointed out that "the correlation among technology stocks has weakened, with individual stock movements becoming more directionally independent. Since the end of 2022, the correlation among individual stocks has significantly decreased over 126 days and is far below its three-year moving average."

Finally, he suggested that investors consider adopting a "Growth at a Reasonable Price" (GARP) investment strategy to look for outperforming stocks within the technology sector, as this strategy tends to perform well when individual stock correlations are declining or below average.

"Under these conditions, companies with reasonable valuations and good growth prospects typically receive market favor," he stated.

"Given the uniqueness of the technology sector (such as high growth, high valuation, and high market capitalization), one approach we use is to conduct a multi-factor ranking of stocks within the sector based on market capitalization, forward P/E ratios for the next two years, and forward EPS growth for the next two years, selecting stocks that rank in the upper half for better performance."

Belski noted that during periods when the relative valuation of the technology sector is above average, stocks adopting the GARP strategy tend to outperform both equal-weighted and market-cap weighted sector indices in the following six and twelve months.

According to statistics, stocks that fit this strategy include: Akamai (AKAM.US), AMD (AMD.US), CDW Corp. (CDW.US), Cognizant (CTSH.US), Dell (DELL.US), Enphase Energy (ENPH.US), EPAM Systems (EPAM.US), F5 Inc. (FFIV.US), First Solar (FSLR.US), GoDaddy (GDDY.US), Gen Digital (GEN.US), Corning (GLW.US), Hewlett Packard Enterprise (HPE.US), HP (HP.US), Intel (INTC.US), Jabil (JBL.US), Juniper Networks (JNPR.US), Keysight Technologies (KEYS.US), Micron Technology (MU.US), NetApp (NTAP.US), NXP Semiconductors (NXPI.US), ON Semiconductor (ON.US), PTC Inc. (PTC.US), Supermicro (SMCI.US), Seagate Technology (STX.US), Skyworks Solutions (SWKS.US), Teledyne Technologies (TDY.US), TE Connectivity (TEL.US), Teradyne (TER.US), Trimble Navigation (TRMB.US), Workday (WDAY.US), Western Digital (WDC.US), Zebra Technologies (ZBRA.US)