TSLA and Small/Large Cap Tech: How Overbought?

By admin_45 in Blog

As bullish as we are about Technology over the long term, there are times when the group isn’t particularly attractive over time horizons as long as 3-6 months. As a theme it gets hot, then cold, then hot again. That’s not just true for the sector, but for names like Google, Facebook, and Tesla. We saw that phenomenon play out last year as investor sentiment see-sawed between safe haven Technology names and reopening trades.

We measure the hype cycle for any group or stock by looking at trailing 100-day relative returns over the last 10 years for the asset in question versus a relevant stock market index. For the S&P large cap Tech sector, the S&P 500 is the right comparison, as it is for Tesla even before its inclusion in the index late last year. For small sap Tech, the S&P 600 is the comparable index.

We did this analysis for large cap Tech, small cap Tech and Tesla and here is what we found:

#1: Tesla’s recent rip (+77 percentage points greater return than the S&P 500 in the last 100 days) is not that statistically unusual.

• Over the last 10 years, TSLA has averaged a 25-percentage point outperformance versus the S&P 500 over any given 100 days, but with a very wide 61 percentage point standard deviation around that mean.
• That puts the one standard deviation relative return band at -36 to +86 percentage points, so at +77 points currently we are not yet even one sigma away from the mean.
• You’d think that as Tesla’s market cap grew it would shed some of its volatility relative to the S&P 500, but that has not been the case. In fact, TSLA’s recent run is more dramatic than any point the stock’s history from 2014 – 2019.

Takeaway: don’t short Tesla here. Crazy as it sounds, the stock’s recent rally is pretty normal action for this name.

#2: Large cap Tech has done well of late (+6.4 percentage points over the S&P in the last 100 days); the group looks a bit frothy here, although not dangerously so:

• Over the last decade, large cap Tech has outperformed the S&P 500 by an average of 2.2 percentage points over any 100-day window. The standard deviation of these relative returns is 4.5 points.
• The one standard deviation range here is therefore -2.3 to +6.7 percentage points, so at 6.4 percent we’re close to the upper end of the band.
• While large cap Tech’s outperformance is, just like Tesla’s, just within one standard deviation of the historical norm we see it as more remarkable because the volatility here is much lower than in the case of TSLA.

Takeaway: we are more positive on cyclical names over the rest of 2021 than large cap Tech. We continue to believe that the most prudent approach for the next 2 months is to even weight Tech, overweight Energy, Financials and Industrials, and underweight defensive groups like Consumer Staples and Utilities.

#3: Small cap Tech looks very much like large cap Tech, outperforming the S&P 600 by 6.5 points over the last 100 days.

• The long run mean outperformance for small cap Tech is 1.7 percentage points and the standard deviation of those relative returns is 5.1 points.
• The one sigma band is therefore -3.4 percent to +6.8 percent of relative outperformance.
• At 6.5 points currently, we’re right up against the edge of “normal” outperformance for the group.

Takeaway: we continue to recommend small cap energy (we both own PSCE personally).

Final thought: the small/large cap Tech analysis here is another way of saying that it’s reasonable to expect some sector rotation as we close out 2021. Technology has been a winning group for many years, and we expect it will continue to be so in the future. But as investors consider where to allocate capital today and think about how Q4 will evolve, we think it likely they will seek out sectors with more exposure to improving economic fundamentals.