The Nasdaq Composite has regained pace this month. The tech-heavy index which single-handedly drove Wall Street's astonishing rally in an unprecedented pandemic-ridden 2020, lost some ground in first-quarter 2021. In the last quarter, the Dow and the S&P 500 rallied 7.8% and 5.8%, respectively, while the Nasdaq Composite gained just 2.8%. However, the tech-laden index has gathered pace in April.
Nasdaq Composite Lags in First Quarter
There were two reasons for the tepid growth of the Nasdaq Composite in first-quarter 2021. The index soared 43.6% in 2020. Notably, from its pandemic-led trough on Mar 23, 2020 to Dec 31, 2020, the index had skyrocketed more than 80%. This astonishing rally compelled several financial experts to say that technology stocks are overvalued.
Meanwhile, the FDA approved two COVID-19 vaccines in December and the third one in January. The Biden administration has ramped up nationwide vaccine deployment on an urgent basis. At the same time, new coronavirus cases declined gradually in the United States. All these positives raise the possibility of a faster-than-expected reopening of the U..S. economy.
At the same time, the cyclical stocks, primarily from those industries that were severely affected due to lockdowns and other restrictions in 2020 are available to market participants at attractive valuations. Consequently, investors' preference shifted to cyclical stocks from technology stocks.
Second, an impressive rally of U.S. stocks prompted investors to reallocate funds from safe-haven government bonds to risky assets like equities. As the demand for bonds declined, bond prices dropped and yields soared. Notably, the yield on the benchmark 10-Year U.S. Treasury Note jumped from 0.9% at the end of 2020 to 1.776% in late March, its 14-month high.
High risk-free return is detrimental to high growth industries like technology. Most of the growth companies depend on easy borrowing at cheap rates. A higher market interest rate will raise their cost of projects. As a result, market participants have started to reallocate their funds to cyclical stocks from growth stocks.
Nasdaq Composite Rebounds in April
Month to date, the Nasdaq Composite has gained 4.4%. Most of the technology stocks are now available at a discount. More importantly, the yield of 10-Year U.S. Treasury Note declined gradually and closed at 1.624% on Apr 8, despite a bull run in stock markets. Consequently, technology stocks once again regained investors' preference.
Technology is the Best Bet in the Long Term
The logic that the technology sector will underperform the 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.
Our Top Picks
We have narrowed down our search to five Nasdaq Composite stocks that have provided double-digit returns year to date. These stocks have strong growth potential for the rest of 2021 and have seen solid earnings estimate revisions in the last 7 to 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 year to date.
Micron Technology Inc. ( MU Quick Quote MU - Free Report) designs, manufactures and sells memory and storage products worldwide. It operates through four segments: Compute and Networking Business Unit, Mobile Business Unit, Storage Business Unit, and Embedded Business Unit.
The Zacks Rank #1 company has an expected earnings growth rate of 93.6% for the current year (ending August 2021). The Zacks Consensus Estimate for its current-year earnings has improved 10.8% over the last 7 days. The stock price has climbed 26.7% year to date.
Alphabet Inc. ( GOOGL Quick Quote GOOGL - Free Report) has been showing increased appetite in the Home Assistant space. It made its foray into this market in 2016 with the launch of Google Home. The company has been growing rapidly in this fast-growing highly-competitive cloud market. The Google search engine is the dominant player in both laptop and mobile platforms. Moreover, Alphabet is strongly positioned with the YouTube platform for online and mobile video.
The Zacks Rank #2 company has an expected earnings growth rate of 18.2% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 0.3% over the last 30 days. The stock price has jumped 28.4% year to date.
Texas Instruments Inc. ( TXN Quick Quote TXN - Free Report) designs, manufactures and sells semiconductors to electronics designers and manufacturers worldwide. The company is seeing particular success in certain fast-growing segments of the automotive market. It operates in two segments, Analog and Embedded Processing.
The Zacks Rank #2 company has an expected earnings growth rate of 13.4% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 1.2% over the last 30 days. The stock price has appreciated 18.9% year to date.
Qorvo Inc. ( QRVO Quick Quote QRVO - Free Report) develops and commercializes technologies and products for wireless and wired connectivity worldwide. It operates in two segments, Mobile Products, and Infrastructure and Defense Products.
The Zacks Rank #2 company has an expected earnings growth rate of 12.9% for the current year (ending March 2022). The Zacks Consensus Estimate for its current-year earnings has improved 0.3% over the last 30 days. The stock price has advanced 16.4% year to date.
Microsoft Corp. ( MSFT Quick Quote MSFT - Free Report) has a dominant position in the desktop PC market, with its operating systems being used in the majority of PCs worldwide. The company has doubled down on the cloud computing opportunity. Moreover, it is one of the three largest providers of gaming hardware.
The Zacks Rank #2 company has an expected earnings growth rate of 28% for the current year (ending June 2021). The Zacks Consensus Estimate for its current-year earnings has improved 0.4% over the last 30 days. The stock price has surged 13.8% year to date.
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