By
Niklashausen
:
In a recent series of articles at Marketwatch and on SA, Michael
Gayed has criticized "Dividendsanity" - which he defines as "the
complete love of dividend-paying stocks by portfolio managers and
media pundits" - and the "negative narrative" and "end of the world
trade" dominating investment decisions at the moment (
see here
,
here
,
and here
).
As evidence he points to the current overvaluation of the
utility sector relative to the technology sector:
"Think about that for a moment. The fear trade made the
technology sector, which has growth potential and is global, trade
at a
discount
to utilities, which are more domestic, heavily indebted, and have
little to no top-line growth. This has occurred because of the
complete and utter fear about the future, and obsession with all
things dividends. Take a look below at the price ratio of the
Technology Select Sector relative to the Utilities Select Sector
SPDR. As a reminder, a rising price ratio means the numerator/XLK
is outperforming (up more/down less) the denominator/XLU. For a
larger chart, visit
here
."
(click to enlarge)
At the right margin of the chart he supplies to illustrate this
relationship Gayed has added an upward-pointing arrow, implying
that a reversal or "Summer Surprise" is about to take place,
sending technology stocks higher relative to utilities. But I'm
skeptical.
Since I hold Vanguard's Utilities ETF, VPU, I decided to test
Gayed's ideas with Vanguard investment products. First I looked for
a sector fund with a low correlation to VPU. As the table below
shows, over the last 126 days Vanguard's Information Technology
ETF, VGT, has shown the lowest correlation with VPU at .35 (source:
eftscreen.com).
|
|
[[VAW]]
|
[[VCR]]
|
[[VDC]]
|
[[VDE]]
|
[[VFH]]
|
[[VGT]]
|
[[VHT]]
|
[[VIS]]
|
[[VNQ]]
|
[[VOX]]
|
[[VPU]]
|
|
|
|
VAW
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VCR
|
0.85
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
VDC
|
0.64
|
0.76
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
VDE
|
0.84
|
0.75
|
0.64
|
1.00
|
|
|
|
|
|
|
|
|
|
|
VFH
|
0.84
|
0.82
|
0.66
|
0.78
|
1.00
|
|
|
|
|
|
|
|
|
|
VGT
|
0.86
|
0.87
|
0.65
|
0.77
|
0.80
|
1.00
|
|
|
|
|
|
|
|
|
VHT
|
0.82
|
0.82
|
0.78
|
0.75
|
0.80
|
0.80
|
1.00
|
|
|
|
|
|
|
|
VIS
|
0.90
|
0.89
|
0.74
|
0.81
|
0.89
|
0.83
|
0.85
|
1.00
|
|
|
|
|
|
|
VNQ
|
0.74
|
0.76
|
0.67
|
0.66
|
0.83
|
0.68
|
0.75
|
0.78
|
1.00
|
|
|
|
|
|
VOX
|
0.68
|
0.70
|
0.67
|
0.65
|
0.75
|
0.63
|
0.72
|
0.75
|
0.65
|
1.00
|
|
|
|
|
VPU
|
0.41
|
0.44
|
0.68
|
0.44
|
0.42
|
0.35
|
0.52
|
0.47
|
0.55
|
0.47
|
1.00
|
|
|
|
|
|
|
|
|
|
|
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|
|
I then constructed a 3-year chart of VGT/VPU similar to Gayed's
chart of XLK/XLU, but with a 10-week simple moving average.
(click to enlarge)
Since the graph shows the ratio of VGT's price to VPU's price,
when the plot is rising the Information Technology ETF is doing
better than the Utilities ETF. When it is falling, Utilities are
doing better than Information Technology.
What we see are three peaks when VGT reached a high valuation
relative to VPU: April 2010, February 2012, and late March / early
April 2012. In all three cases, the VGT/VPU ratio was greater than
.98. We also see five valleys when VGT was undervalued relative to
VPU: July 2009, August 2010, and August, September, and December
2011. In all these latter cases, the VGT/VPU ratio was less than
.82.
Note too that a false bottom occurred in June 2011, when the
ratio dipped below .88, popped up a bit in July, and then crashed
below .82 in August. This reversal happened at about the same ratio
that VGT/VPU has today, .87. To me this suggests that it's not yet
time to sell utilities and buy technology, but rather a time to be
wary of another false bottom.
Michael Gayed may be right that investors are too fearful right
now to give up their dividends and embrace the potential of
high-growth technology stocks. But the optimistic arrow pointing to
a "Summer Surprise" at the right margin of his graph seems
premature and unjustified to me. The various crises and dangers
facing the world economy still seem to warrant caution and prudence
more than hope and exuberance. Investors should probably wait until
the VGT/VPU ratio drops below .82 and then rebounds above the
10-week moving average before jumping out of utilities into
information technology. Perhaps "dividendsanity" is just another
word for prudence.
Disclosure:
I am long [[VPU]].
Additional disclosure:
I am not a registered investment advisor and do not provide
specific investment advice. The information contained herein is for
informational purposes only. Nothing in this article should be
taken as a solicitation to purchase or sell securities. Before
buying or selling any stock you should do your own research and
reach your own conclusions.
See also
10 High-Growth Stocks Under $5 Undervalued By
Levered Free Cash Flows
on seekingalpha.com