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Is the Tech Rout Overstated? Buy 3 Stocks & ETFs on the Dip

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The latest tech rout that started on June 9 has already wiped out about $250 billion from the value of technology shares. The tech-heavy Nasdaq-100 ETF PowerShares QQQ Trust QQQ lost over 3.1% and tech behemoth Technology Select Sector SPDR Fund XLK dropped 3.3% in the last five days (as of June 15, 2017) (read: Correction in U.S. Tech Sector? Inside Most-Hurt ETFs).

The space was red hot this year with XLK returning over 15% on the year-to-date basis even after the sell-off. However, the journey halted on June 9 after Goldman Sachs Group Inc. analysts led by Robert Boroujerdi raised a red flag and indicated that “low volatility in select technology giants including Alphabet Inc., and Apple Inc. may be blinding investors to risks.”

Added to this, Apple – one of the drivers of the latest tech rally – was downgraded by Mizuho Securities' Abhey Lamba. No wonder, all these warnings along with overvaluation concerns after an astounding rally will lead to a crash. Facebook (FB - Free Report) , Apple AAPL, Amazon AMZN, Microsoft MSFT and Google-Alphabet GOOGL – or FAAMG stocks – which once powered the rally, lost about 3%, 6.7%, 4.8%, 2.6% and 4.2%, respectively, in the last five days (as of June 15, 2017) (read: Move Over FAANGs: China Tech Stocks and ETFs are the Hottest).

But Does Tech Deserve This Level of Stampede?

As per Canaccord, Facebook, Amazon, Netflix and Google or FANG stocks “represent a large portion of the growth opportunities within large-cap tech, and six months ago all the valuations were quite reasonable." The renowned firm has agreed that valuations have spiked from what they were last three years ago. However, it’s still reasonable given the historical standards, especially the phase of dotcom bubble.

Most importantly, out of 21 large-cap tech stocks with estimated organic sales growth for 2017 greater than 15%, four are FANGs. And if we move into 2018, just eight companies meet this criterion, according to Canaccord.

Plus, apart from the valuation issue, hardly anyone would disagree that a sound operating backdrop and fundamentals are tied with the tech sector. Even Goldman Sachs approved that FAAMG boasts lower valuations and better cash balances. Canaccord also expects FANGs to continue to capitalize on “digital advertising, digital video consumption, e-commerce and cloud services.”

Stocks & ETFs to Buy on the Dip

We thus highlight a few tech stocks and ETFs below that can be bought on the dip. Most of these stocks and ETFs offer compelling valuations against the industry standards.

Stock Picks

Western Digital Corporation WDC

Western Digital Corp. manufactures and markets a broad line of hard drives based on leading-edge technology. The company's hard drives are designed for the desktop PC market and new video recording devices.

The Zacks Rank #1 (Strong Buy) stock has a forward P/E ratio of 11.4x compared with industry P/E of 14.5x. P/S ratio stands at 1.5x compared with industry P/S of 2.3x. The Zacks Industry Rank of this stock is in top 7% and Sector Rank is in top 38%. The stock has a VGM (Value-Growth-Momentum) score of ``A’.

Alphabet Inc. GOOGL

The company provides web-based search, advertisements, maps, software applications and mobile operating systems. The Zacks Rank #1 stock has a forward P/E ratio of 27.9x compared with industry P/E of 35.4x. P/S ratio stands at 7.1x compared with the industry P/S of 6.7x. The Zacks Industry Rank of this stock is in top 19%. The stock has a VGM (Value-Growth-Momentum) score of ‘B’.

Applied Optoelectronics Inc. AAOI

Applied Optoelectronics manufactures advanced optical devices, packaged optical components and optical subsystems among other things.The Zacks Rank #1 stock has a forward P/E ratio of 14.4x compared with the industry P/E of 15.2x. P/S ratio stands at 4x compared with industry P/S of 3.7x. The Zacks Industry Rank of this stock is in top 40%. The stock has a VGM (Value-Growth-Momentum) score of ‘B’.

ETF Picks

SPDR S&P Technology Hardware ETF XTH

The fund offers exposure to the technology hardware segment of the S&P TMI and consists of Electronic Components, Electronic Equipment & Instruments, and Technology Hardware, Storage & Peripherals. WDC has a weight of 3.36% in the fund.

The fund has a P/E ratio of 17.89 times against the highest P/E of 46.42x seen by Ark Innovation ETF (ARKK). The fund has a Zacks ETF Rank #2.

Social Media Index ETF SOCL

The fund offers exposure to the social media space. Tencent Holdings Ltd, Facebook and Twitter account for close to 30% of the fund. Alphabet Inc-Cl A accounts for about 5% of the fund. Investors should note that FB and Twitter too have a good VGM score of B, making this fund a compelling bet. The fund has a P/E of 26.18x. The fund has a Zacks ETF Rank #1.

John Hancock Multifactor Technology ETF JHMT

The fund offers exposure to the performance of the John Hancock Dimensional Technology Index. Microsoft, Apple, Facebook and Alphabet are in the fund’s top 10 list. The fund has a P/E of 20.43x. The fund has a Zacks ETF Rank #2 (read: Tech ETFs to Tap Oracle Earnings Beat & Cloud Boom).

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