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Are Tech Bubble Fears Overblown? 6 Top-Ranked Picks

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Tech stocks have been on a tear this year and Wednesday’s session was no exception with the Nasdaq closing 0.5% higher. Overall, tech stocks have been largely responsible for the long-running market rally. But bubble fears are making a comeback courtesy of a bunch of leading analysts and market watchers.

They feel that monetary tightening by the Federal Reserve and the ECB could lead to a sudden selloff. However, others feel that sector fundamentals are firmly in place and valuations are far from worrying. The ability to innovate and generate strong profits make tech stocks must haves for your portfolio.

Rate Hikes Raise Bear Market Fears

Michael Hartnett, a strategist at Bank of America’s (BAC - Free Report) Merrill Lynch recently warned that tech stocks have strong downside risks. Hartnett thinks that the strong performance of tech stocks, especially the FAANG group, has led to disconnect between U.S. equity markets and events occurring in other parts of the world. 

Hartnett thinks that this "conscious decoupling" is likely to evaporate in the months ahead as major central banks undertake monetary tightening. The Fed is widely slated to raise rates this week. And record-low employment levels could lead to further rate hikes even at the cost of roiling the equity markets.

Meanwhile, the ECB is also likely to begin cutting down on its bond purchases in the next few months. Emerging markets are following suit, with 33 rate hikes in the last nine months. Global monetary tightening would mean an end to easy money for the bourses, raising the risk of “quick, deep tech sell-off,” thinks Hartnett.

Strong Fundamentals Still in Place

In contrast, analysts at Goldman Sachs (GS - Free Report) have taken a distinctly optimistic view of tech stocks. In a recent paper titled "Why Technology Is Not a Bubble," the investment bank says that the recent success of tech stocks is attributable to strong fundamentals. This is in sharp contrast to the dot-com bubble which built up in the 1990s.

Essentially, tech companies are raking in profits and creating industry-wide disruptions in the process. But valuations are not a cause for worry, according to the investment bank’s Peter Oppenheimer.

Oppenheimer agrees that the collective market capitalization of Amazon.com, Inc. (AMZN - Free Report) , Apple Inc. (AAPL - Free Report) and Microsoft Corporation (MSFT - Free Report) is greater than the annual GDP of all the 54 African countries taken together.

However, such phenomenal valuations are justifiable through strong fundamental growth. Further, valuations as a share of the S&P 500 are below the levels witnessed during earlier market bubbles.

Our Choices

Wall Street seems to be having a tough time making up its mind about a tech bubble. A section of analysts believe that a bubble has indeed built up. This is why looming rate hikes could soon roil the markets party, leading to a deep selloff for tech stocks.

Others think that such fears are overblown. This is because recent gains are attributable to strong fundamentals. Also, valuations are not worrying and remain below historical bubble-era levels. This is why picking tech stocks still looks like a smart option at this point. However, picking winning stocks may 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, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate Technology Plc (STX - Free Report) is the second-largest manufacturer of hard disk drives (HDDs) in the United States.

Seagate Technology’s expected earnings growth for the current year is 29.6%. The Zacks Consensus Estimate for the current year has improved by 0.9% over the last 30 days.

Western Digital Corporation (WDC - Free Report) is one of the largest HDD producers in the United States.

Western Digital’s expected earnings growth for the current year is 59.5%. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 30 days.

Micron Technology, Inc. (MU - Free Report) has established itself as one of the leading worldwide providers of semiconductor memory solutions.

Micron Technology’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 4.7% over the last 30 days.

Immersion Corporation (IMMR - Free Report) develops hardware and software technologies that enable users to interact with computers using their sense of touch.

Immersion Corporation’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 51.5% over the last 60 days.

Nanometrics Incorporated (NANO - Free Report) is a leading provider of advanced, high-performance process control metrology and inspection systems used primarily in the fabrication of semiconductors and other solid-state devices.

Nanometrics’ expected earnings growth for the current year is 84%. The Zacks Consensus Estimate for the current year has improved by 36.1% over the last 60 days.

Ultra Clean Holdings, Inc. (UCTT - Free Report) is a developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar and medical device industries.

Ultra Clean Holdings’ expected earnings growth for the current year is 1%. The Zacks Consensus Estimate for the current year has improved by 2.6% over the last 60 days.

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