Tech stocks will outperform the market in the coming months, thus staging a rebound from the sector's February correction and last week's steep declines, according to several analysts. They offer four main reasons, per Bloomberg: strong first quarter earnings; brisk revenue growth; technical strength; and reduced short selling.
That's why Andrew Garthwaite, head of global equity strategy at Credit Suisse Group AG, sees buying opportunities. "What I like about tech is it's cyclical, defensive, (it has) growth, and is highly suited for this late in the bull cycle," he told CNBC.
Tuesday's trading was mixed, with FAANG stocks such as Facebook Inc. (FB), Alphabet Inc. (GOOGL) and Apple Inc. (AAPL), falling while Amazon.com (AMZN), and Neflix Inc. (NFLX) were up as of 1:30pm in NYSE trading.
Garthwaite's Favorite Tech Niches
Within technology, Garthwaite particularly likes cybersecurity, gaming, and software companies, CNBC reports, though he did not mention specific stocks. He notes that tech stocks performed relatively well during the broad market correction earlier this year, and in the face of rising bond yields. Also, he observes that tech companies tend to have strong cash flow and solid balance sheets with comparatively low levels of debt, per CNBC.
"For all of it, the valuation is not excessive," as he told attendees at a Credit Suisse conference, per CNBC, with the caveat that U.S. tech stocks tend to be more "overbought" than their overseas rivals. His biggest concerns are data protection laws and taxes on digital services. Nonetheless, he also observes that advances pioneered by tech companies ultimately allow other companies to operate more efficiently, boosting their earnings and stock prices, per CNBC.
Stocks to Watch
Morgan Stanley (MS) recently recommended software giant Microsoft Corp. (MSFT) and computer networking leader Cisco Systems Inc. (CSCO) as among their top stock picks for short-term gains. They mentioned Cisco specifically related to solutions that it offers to reduce the cost of security breaches. (For more, see also: 8 Stocks for Big Short-Term Gains.)
MIcrosoft also been growing its computer gaming business, making it a major player alongside companies such as Electronic Arts (EA). Moreover, these two companies and software developer Adobe Systems Inc. (ADBE) have been cited for their success in creating steady revenue growth through subscription pricing. (For more, see also: 5 Tech Stocks' New Growth Engine.)
The Four Reasons For More Outperformance
The first reason for analysts' bullishness is superior earnings. Analysts polled by Bloomberg project that tech companies will post 23% year-over-year earnings growth for the first quarter, versus 17% for the S&P 500 Index (SPX) as a whole, which could sharply boost tech shares.
The second cause of optimism is revenue. Tech companies should post average full year revenue growth of 10% in 2018, compared to 6.7% for the S&P 500, according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse, per Bloomberg.
Third, on the technical side, Bloomberg sees strength in the fact that more than 84% of the stocks in the S&P 500 Information Technology Index (S5INFT) are trading above their 50-day moving averages. This is near their high before the market correction, and much better than the 51% figure for the entire S&P 500, Bloomberg notes.
The last positive indicators are money flows and short selling. The PowerShares QQQ ETF (QQQ), which tracks the tech-heavy Nasdaq 100 Index (NDX), received a net inflow of $3.3 billion last week, the most since the Dotcom Bubble, Bloomberg says, while the number of shares borrowed by short sellers has plummeted by more than two-thirds since late February.
The S&P 500 Information Technology Index set a new all-time closing high on March 12, 2.5% above its pre-correction record high close on January 26, per S&P Dow Jones Indices. However, from the close on March 12 through the close on March 19, the index retreated by 3.3%, leaving it 0.9% below its January 26 value. The Nasdaq 100 Index, meanwhile, has followed a roughly similar path: up by 1.5% from its old record high close on January 26 to a new record on March 12, then down by 3.7% through March 19, for a net drop of 2.3% from January 26, per Yahoo Finance.