Tech stocks had started 2018 on a strong note with the Technology Select Sector SPDR (XLK) gaining a whopping 17% by the end of August. However, the tide turned for tech post that, resulting in a grievous rout for the sector. Notable casualties of this phenomenon are long-term investor favorites, the FAANG stocks which tasted both the highs and the lows that year.
Sky-high valuations may have triggered the rout in the first place, but other macroeconomic factors were also at play. These include a weakening growth environment and stronger rate environment.
However, as routs go, this is not as severe as others that have taken place in market history. Further, tech companies are financially far stronger than what they were during the last major market reverse for stocks, the dotcom bubble. This is why the current debacle is a good chance to buy into the sector and add select value picks to your portfolios.
Valuations, Regulation & Broader Concerns Rattle Sector
In the last quarter of 2018, the XLK lost more than 17.7% owing to several factors. First, valuation fears struck home with investors finding even healthy earnings inadequate to justify surging share prices. This is because a number of headwinds were hitting industry majors at the time.
By November, rumors were rife that Apple (
AAPL - Free Report) was cutting iPhone production. These reports actually came true with Apple slashing its holiday sales projections. Also, Facebook ( FB - Free Report) paid a price for its questionable privacy standards.
Investors were also concerned about tech majors facing stiffer regulatory standards. Meanwhile, semiconductor makers like NVIDIA (
NVDA - Free Report) and Applied Materials ( AMAT - Free Report) were facing woes of their own with trade tensions leading to fears of lower demand.
Additionally, the sector had to face broader concerns which were weighing on markets at large. An economic slowdown and a stiffer rate environment also contributed to their downfall, since their heady ascent meant their descent would be rocky at best.
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But as tech routs go, the recent reverse is far less than severe than other historical reverses. Currently, almost half of the tech stocks in the Nasdaq 100 are languishing in a bear market. Still, it helps to keep in mind that the dotcom bubble was such a disaster that it took years for the Nasdaq 100 to move above its 2000 high. Several dotcom era favorites like Pets.com vanished altogether.
And tech majors are in a much stronger financial position compared to the 2000s. Apple is holding $237.1 billion in cash at the moment. In the third quarter, Amazon (
AMZN - Free Report) posted record net income of $2.9 billion. And Facebook’s third-quarter earnings blew past expectations.
Such strong financial performances are likely to protect tech stocks from a tougher rate environment. Another factor working in their favor even in difficult conditions is the “moats” or barriers to entry which they have created over time. This allows them to sustain their competitive advantage.
Tech stocks have survived a bad year, and more importantly a terrible quarter. But their financial condition looks solid overall. Several of them have also been able to create distinctive barriers to entry which are likely to serve them well in difficult times.
Adding select value stocks from the sector to your portfolios looks like a good option at this time
. Our selection is also backed by a good Zacks Value Score and Zacks Rank.
We narrowed down our choices with the help of our new
style score system .
Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best opportunities in the value-investing space.
Each of our picks has a Zacks Rank #1 (Strong Buy) and a Value Score of A. You can see
the complete list of today's Zacks #1 Rank stocks here. Dell Technologies Inc. ( DELL - Free Report) is a designer, developer, manufacturer and seller of information technology products and services.
Dell Technologies’ forward price-to-earnings ratio (P/E) for the current financial year (F1) is 7.84, lower than the industry average of 16.06.
inTEST Corporation ( INTT - Free Report) is an independent designer, manufacturer and marketer of ATE interface solutions and temperature management products.
inTEST Corp has a P/E (F1) of 5.84x, lower than the industry average of 12.09.
AU Optronics Corp. ( AUO - Free Report) is a world-leading manufacturer of large-size thin film transistor liquid crystal display panels.
AU Optronics has a P/E (F1) of 9.85x, lower than the industry average of 13.65.
DHI Group, Inc. ( DHX - Free Report) is a provider of data, insights and connection services to select professional communities.
DHI Group has a P/E (F1) of 6.91x, lower than the industry average of 16.50.
CSG Systems International, Inc. ( CSGS - Free Report) is a leading provider of outsourced billing, customer care and print and mail solutions and services supporting the North American cable and direct broadcast satellite markets.
CSG Systems has a P/E (F1) of 10.95x, lower than the industry average of 16.43.
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