Investors are encouraged to catch falling stars and dodge falling knives. But is the knife in free fall, is the trajectory ‘selective’, how sharp is the knife? Is anything left unscathed? Are there pockets of opportunity? This correction (Tech sector TSR -11.13% YTD/Sector PE 18.2x, 19.3x in February) is playing out in the midst of reporting season, so investors have a real-time monitor informing them how companies are responding to the maelstrom (Spoiler Alert: Reported numbers are in line . . sequential guidance disappoints . . . share prices weaken). For now, Sell-side analysts will reduce target prices to reflect wider market conditions, and so add fuel to the unease. However, we take comfort: the reported strategic KPIs/magic numbers, indicate that underlying operating performance is strengthening for the majority, so far no evidence of any broader slowdown. We want to ‘buy the dip’, not the knife.

Share valuation and Momentum

Reviewing our c.460 company universe, which span 30 distinct cohorts, we see how the pricing for the company groups has moved in the past few weeks. We examine a series of measures:

1. Tech Sector TSR: Downturn is worse for smaller companies

Message: Sector TSR collapsed in the past couple of weeks falling from +8% YTD to the current -11.13%. In the fall, smaller and mid-cap companies were hardest hit. So too were IT Service companies, more than Software companies. While (dividend paying) income shares should have been relatively insulated, in fact they were hit only a little less than the ‘growth’ shares.

2. Tech Sector TSR is -11.13% YTD

Message: The best performing companies are Computacenter, Quartix, Alphaware IP, K3 and Triad. The poorer performing shares are currently Iomart, Pri0r1ty,TPXimpact, Zoo Digital and Winking Studios. The only unifying attribute across the risers and fallers is that, with the exception of Computacenter they are all smaller caps.

3. Tech Sector Valuation heatmap: Who is better/who is worse

Message: The general pattern of the pull back is that while it started with the Magnificent shares, it has since spread through the sector, so all are cheaper. To be sure there are pockets of better performance, notably in Defence, but all have suffered.

4. Tech Universe – Share valuation and momentum – by cohort

Message: There has been a general retreat from the top right quadrant, so positively, the sector is getting cheaper. But negatively, shares are under-performing. The best performing cohort is Defence-Tech (reflecting the geo-political situation), followed by AI-RAG (reflecting a specific technology driver).

5. Software group mid-point next quarter Y/Y revenue growth (%)

Message: Guidance might disappoint some, but mid-point Y/Y revenue growth across the software industry suggests continued healthy revenue growth (18.6% Y/Y growth), not decline. However, there is caution that any continued correction will only encourage IT buyers to delay procurement as a trade war creates inflation and economic contraction.

6. The UK market – Remains a safe place to hide (better than a duvet)

Message: Good news – while all indices have retreated, the UK Techmark remains a safe ‘place to hide’ in this market. As the dust clears we would expect more international investors to come to the UK to reduce US market risk on their way to established Asian growth seams. Note: As an inducement, the UK remains attractively priced and has a stable political backdrop. As always ‘bottom fishers’ look for extreme over-sold situations – but in truth – that is a long list.