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Will Technology Sector Recovery Continue? 5 Top Picks

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After a disappointing 2018, Wall Street has been gaining momentum steadily in 2019. The technology sector, which bore the brunt of market volatility in 2018, has been recovering impressively so far this year. On Feb 22, the Technology Select Sector SPDR (XLK), one of the 11 sectors of the S&P 500 index, gained a significant 1.3%.

Positive development on the trade war front, financial stimulus by the Chinese authorities to stabilize its economy and massive product innovations will act as near-term catalysts for the technology sector’s revival. Consequently, it will be prudent to invest in technology stocks with a favorable Zacks Rank.

Technology Sector Rebounds in 2019

The technology sector suffered severe setback in 2018. Technology Select Sector SPDR (XLK) declined 2.9% last year. The tech-laden Nasdaq Composite plunged 3.9% in 2018. However, XLK and Nasdaq Composite are up 14% and 13.5%, respectively, year to date. Notably, out of 11 sectors of the benchmark S&P 500, technology is the third best performer. It only trails the Industrials Select Sector SPDR (XLI) and Energy Select Sector SPDR (XLE), which have gained 18.3% and 14.7%, respectively.

Positive Developments on Trade War Front

The 11-month long trade dispute between the United States and China is heading toward a possible resolution in March. On Feb 22, President Donald Trump met Liu He, the Chinese Vice Premier and "special envoy" to Chinese President Xi Jinping. Following the meeting, Trump announced that that he will delay a major tariff hike to provide both the countries more time to reach a trade deal.

Per CNBC, the two countries are considering a late March meeting between President Trump and Chinese President Xi Jinping in Florida. CNBC has also reported that China has committed to import $1.2 trillion of U.S. exports. However, the two countries are yet reach an agreement on the most crucial issue of forced transfer of intellectual property.

China Taking Steps to Stimulate Economy

On Jan 24, the People’s Bank of China introduced bill swap mechanism, enabling the holders to swap commercial bank perpetual debt for central bank bills to be used for borrowing collateral. The move will accelerate efforts to stimulate growth of the country’s economy by improving credit availability for smaller companies. Moreover, the Chinese Ministry of Finance has pledged to cut taxes and augment infrastructure spending which in turn will aid in bolstering market sentiments.

A strong Chinese economy will be a boost for the U.S. technology companies as China is the largest market for high-tech products. Additionally, China also plays the role of low-cost supplier of inputs to the high-tech U.S. industries.

Product Innovations

The technology sector is benefiting from continued strong digital transformation environment. The last few years have witnessed a series of breakthroughs in cloud computing, predictive analysis, artificial intelligence (AI), self-driving vehicles, digital personal assistants and Internet-of-Things (IoT), which have set the stage for robust growth. The United States is all set to witness massive deployment of 5G wireless networks in 2019. This will significantly raise the demand for high-tech handheld gadgets and micro-processors.

Our Top Picks

At this stage, it will be a prudent move to invest in stocks from technology sector. Each of our picks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

TESSCO Technologies Inc. (TESS - Free Report) architects and delivers products and value chain solutions to support wireless systems in the United States. The company has expected earnings growth of 38.2% for current year. The Zacks Consensus Estimate for the current year has improved by 22.6% over the last 60 days.

Xilinx Inc. (XLNX - Free Report) designs and develops programmable devices and associated technologies worldwide. The company has expected earnings growth of 23.3% for current year. The Zacks Consensus Estimate for the current year has improved by 6.1% over the last 60 days.

Telenav Inc. (TNAV - Free Report) provides connected car and location-based platform services in the United States and internationally. The company has expected earnings growth of 75.8% for current year. The Zacks Consensus Estimate for the current year has improved by 10.4% over the last 60 days.

OSI Systems Inc. (OSIS - Free Report) designs, manufactures, and sells electronic systems and components worldwide. The company has expected earnings growth of 11.4% for current year. The Zacks Consensus Estimate for the current year has improved by 3.1% over the last 60 days.

eGain Corp. (EGAN - Free Report) operates as a software-as-a service provider of customer engagement solutions in the United States, the U.K., India, and internationally. The company has expected earnings growth of 216.7% for current year. The Zacks Consensus Estimate for the current year has improved by 137.5% over the last 60 days.

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