The ins and outs of investing in technology stocks in 2021

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News Highlights: The ins and outs of investing in technology stocks in 2021

With the tech-heavy Nasdaq 100 index hitting a new record at nearly 13,600 in recent days, tech stocks remain one of the hottest segments of the financial markets since the pandemic created strong positive momentum for the industry amid lockdowns.

The rally that followed the index’s lows in March was quite a ride for investors, like those who decided Buy Amazon stock or other similar technology stocks during that time have more than doubled the value of their portfolios in about 10 months, although the Nasdaq has fallen from its last peak in the last few days amid the turmoil triggered by a series of bizarre events such as the GameStop (GME) short squeeze.

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In this regard, it would be reasonable to ask whether technology stocks remain attractive at their current levels as these companies could lose some of their luster in a post-pandemic world as their earnings are likely to grow at a much slower rate than they do. during the crisis.

To respond to that question, let’s take a closer look at the ins and outs of investing in technology stocks in the current environment so that investors can make a decision based on the information provided.

The ‘ins’ of technical stocks

According to data from research firm McKinsey & Company, one factor supporting a continued bullish position for tech stocks – even after the pandemic situation has receded – is an acceleration in the adoption of digital solutions to support the operations of thousands of companies around the world.

In this regard, the McKinsey report highlights that the pandemic has increased customer digital interactions by more than 20%, potentially accelerating adoption of digital solutions by three years on a global scale.

In particular, 53% of organizations that responded to the company’s survey said they believe the demand for online shopping will continue to grow even after the health emergency is a thing of the past, while 54% also believes companies will continue to migrate their digital media. assets to the cloud.

In a context such as that described in this report, it is highly likely that technology stocks will continue to be among the biggest winners in the stock market, because while earnings may decline temporarily once things return to normal, most companies have the benefits of increased reliance of digital solutions.

If so, this realization will gradually drive greater demand for tech companies until their sales bounce back to the numbers we saw during the pandemic.

The ‘outs’ of investing in tech stocks right now

The latest frenzy seen by stocks of companies like GameStop (GME) and AMC Entertainment (AMC) only proves that the stock market has gotten a little out of hand with the introduction of free trades for retail investors and the use of derivatives such as call options – which have created temporary disruptions in the company’s valuations.

In this particular environment of extreme greed, tech stocks remain one of the busiest trades on Wall Street, as indicated by Bank of America’s Fund Manager Survey, where a total of 80% of survey respondents said they currently had long positions in tech companies because of their perceived upside potential.

Overflowing transactions are particularly dangerous because they can lead to disruptions in the dynamics of supply and demand in the markets.

Similar to what has happened recently with the stocks with the most short positions, a long squeeze can occur for the most crowded sectors of the market, prompting investors to sell their shares if the markets were to fall sometime in the following months .

In light of this data, it seems technology stocks have downside potential and this is something that investors should know before taking a position at a time when the entire market seems to be confident that the industry is not hitting one in any way.

Briefly

With a little bit of information about technology stocks in 2021, you can make a decision whether to jump the bull train by buying individual stocks or even exchange-traded funds (ETF) that track the technology sector, or if you’d rather turn around. to other, less crowded opportunities in the market that can offer both upside potential and a less pronounced chance of a strong downturn.

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