On Mar 4, the tech-heavy Nasdaq Composite Index entered into negative territory year to date for the first time in 2021. This surprises many market participants as the index was the main driver of Wall Street's recovery in the pandemic-ridden 2020 with an astonishing rally of 43.6%, its best yearly performance since 2009 when it had jumped 43.9%. The tech-laden index started 2021 with a strong rally but its lost momentum in the second half of February.
What causes Nasdaq's recent reversal? The recent spike in long-term sovereign bond yields compelled investors to dump technology stocks in favor of cyclical stocks. Buoyed by Wall Street's impressive rally, investors reallocated funds from safe-haven bonds to risky asset like equities resulting in a surge in bond yields.
The yield of the benchmark U.S. 10-year Treasury Note is currently hovering around 1.54%. On Feb 25, the yield jumped to 1.614%, its highest since Feb 14, 2020. Higher risk-free return is detrimental to high-growth industries like technology as most of these companies depend on easy borrowing at cheap rates.
On Mar 4, stock markets fell sharply. In intraday session, the Nasdaq Composite entered in correction territory when it fell more than 10% from its recent peak of 14,175.12 on Feb 16. The last time the index entered correction mode was on Sep 9, 2020. However, the index managed to came out of the correction zone at the end of day's trading. Year to date, the Nasdaq Composite is down 1.3% while both the Dow and the S&P 500 has managed to stay in green.
Nevertheless, we believe that the technology sector will remain indispensable in the long-term and recent meltdown is a temporary phenomenon. The sector will gain momentum once macro-economic variables stabilize. Meanwhile, a handful of Nasdaq Composite listed stocks with a favorable Zacks Rank popped last month and has more upside left. Investment in these stocks should be fruitful going forward.
Technology is the Best Bet in the Long Term
Several economists and financial experts have expressed doubt that the technology sector may lag the other cyclical sectors like consumer discretionary, financials, industrials, materials and energy as the U.S. and global economy reopens.
The logic that the technology sector will underperform other cyclical sectors may be true for a short period of time but in the long term, technology stocks will remain the best bets. We must not forget that the growing demand for hi-tech superior products has been a catalyst for the sector in an otherwise tough environment. A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, have given a boost to the overall space.
The thrust for digitization is likely to come from two sides. Individuals, who enjoyed immense benefits of digital platforms during the coronavirus-induced lockdowns last year, are less likely to go back to their old habits. The new way of connecting has opened up a new world for them. Also, business entities will be more interested in cloud computing, automation and AI to establish smooth supply chain systems.
Leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared with the developed world. The countries which are more digitized have been able to minimize their losses during the pandemic. These are major lessons to the other countries. Even those who are less inclined toward digital technology and online platforms, are now feeling the massive advantage of online transactions.
Our Top Picks
We have narrowed down our search to five Nasdaq Composite listed technology stocks. These stocks have strong growth potential for 2021 and witnessed favorable earnings estimate revisions in last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see
. the complete list of today’s Zacks #1 Rank stocks here
The chart below shows the price performance of our five picks in the last month.
Applied Materials Inc. ( AMAT Quick Quote AMAT - Free Report) provides manufacturing equipment, services and software to the semiconductor, display and related industries. It operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets.
This Zacks Rank #2 company has an expected earnings growth rate of 43.4% for the current year (ending October 2021). The Zacks Consensus Estimate for current-year earnings has improved by 19.4% over the last 30 days.
Amkor Technology Inc. ( AMKR Quick Quote AMKR - Free Report) provides outsourced semiconductor packaging and test services in the United States, Japan, Europe, the Middle East, Africa, and rest of the Asia Pacific.
This Zacks Rank #1 company has expected earnings growth of 28.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 33.3% over the last 30 days.
Coherent Inc. ( COHR Quick Quote COHR - Free Report) provides lasers, laser-based technologies, and laser-based system solutions for a range of scientific, commercial, and industrial research applications. It operates in two segments, OEM Laser Sources and Industrial Lasers & Systems.
This Zacks Rank #2 company has expected earnings growth of 84.7% for the current year (ending September 2021). The Zacks Consensus Estimate for current-year earnings has improved by 6.6% over the last 30 days.
Sanmina Corp. ( SANM Quick Quote SANM - Free Report) provides integrated manufacturing solutions, components, products and repair, logistics, and after-market services worldwide. It operates in two businesses, Integrated Manufacturing Solutions; and Components, Products and Services.
This Zacks Rank #2 company has expected earnings growth of 21.6% for the current year (ending September 2021). The Zacks Consensus Estimate for current-year earnings has improved by 4.4% over the last 30 days.
Synaptics Inc. ( SYNA Quick Quote SYNA - Free Report) is a leader in designing and marketing human interface solutions such as touchpads for notebook computers, capactive touch screen controllers for handsets and biometric fingerprint sensors for mobile devices.
This Zacks Rank #2 company has expected earnings growth of 28.1% for the current year (ending June 2021). The Zacks Consensus Estimate for current-year earnings has improved by 9.8% over the last 30 days.
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