Following major losses after the surprise Brexit verdict, tech stocks have staged a remarkable turnaround. The S&P 500 Technology Sector (XLK) is up 8.3% over the last one month, leading all the 10 industrial sectors. Additionally second quarter earnings for some key heavyweights have been particularly encouraging.
There have been major factors behind the resurgence of the sector which still faces the threat of foreign headwinds. However, such concerns may be overblown which is why it may be a good idea to bet on tech stocks.
The surprise result of Britain’s referendum resulted in the Nasdaq’s worst percentage decline since Aug 2011. Financials were the most badly hit but the tech heavy index lost 4.1% and major sector heavyweights were singed. Apple (AAPL - Free Report) , Alphabet Inc. (GOOGL - Free Report) and Facebook, Inc. (FB - Free Report) lost 2.8%, 4.2% and 2.6%, respectively. Other newer players were hit equally badly. Digital payment service PayPal Holdings Inc. (PYPL - Free Report) declined 4.3% (read: 4 Safe Small-Cap Tech Stocks to Play Brexit).
One of the fundamental reasons for this kind of a shock is the extent of the sector’s dependence on foreign sales. According to a recent study by Goldman Sachs (GS), tech companies have the highest foreign sales exposure among all the sectors. Nearly 59% of the revenue of the sector is attributable to foreign sales. This amounts to nearly 22% of the total revenue of the S&P 500’s revenue.
Sector Majors Risky, Brexit Fears Overblown
Of the stocks which are sector leaders, Apple garners 65% of its revenue from overseas. These percentages are 53% and 54% for Facebook and Alphabet, respectively. Relatively safe among the FANG stocks is Amazon (AMZN - Free Report) with 34% of its earnings attributable to foreign markets. In such a situation, companies with lower market capitalizations could be better options for investors.
Additionally, the impact of Brexit has been limited up to now. For instance, Germany’s business confidence index declined only marginally in July, to 108.3 from June’s reading of 108.7. Further, Markit’s Eurozone Composite PMI has declined less than expected in June, from 53.1 to 52.9, compared to estimates of 52.5. ECB President Mario Draghi has also held out the promise of additional stimulus measures after observing the impact of Britain’s decision.
Despite near-term concerns, tech stocks offer the promise of high growth. This is particularly pertinent in an environment marked by low growth and low interest rates across the world. Also, encouraging earnings from the likes of Microsoft (MSFT - Free Report) hold out the promise of steady growth.
At the same time it may be a better idea to look for options which are smaller and may have relatively lower or negligible foreign exposure. However, picking winning stocks may prove to be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.
EarthLink Holdings Corp. provides IT services and communications to business and residential customers primarily in the U.S.
EarthLink Holdings has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 40.6% over the last 30 days.
ARI Network Services Inc. is a provider of business-to-business Internet e-commerce solutions for manufacturers with shared distribution and service networks.
ARI Network Services has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 35.7% for the current year.
Seagate Technology plc (STX - Free Report) is the second-largest manufacturer of hard disk drives (HDDs) in the U.S.
Seagate has a Zacks Rank #2 and a VGM Score of A. Its earnings estimate for the current year has improved by 29.8% over the last 30 days. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 12.25.
F5 Networks, Inc. (FFIV - Free Report) is a leading provider of integrated Internet traffic and content management solutions designed to improve the availability and performance of mission-critical Internet-based servers and applications.
F5 Networks has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 5.7% for the current year. Its earnings estimate for the current year has improved by 2.3% over the last 30 days.
Avid Technology, Inc. (AVID - Free Report) develops, markets, sells and supports a wide range of software and systems for creating and manipulating digital media content.
Avid Technology has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. It has a P/E (F1) of 6.23, which is lower than the industry average of 21.55.
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