Top investors say it’s foolish to ignore the value in tech stocks right now. What to buy and when
Months of heavy selling has crippled the growth-focused technology sector, prompting prominent investors to come to the conclusion that a slew of stocks are now ripe for investment. To be sure, many also agree a bottom hasn’t been priced in just yet, but stocks have toppled so far off their record highs that some battered names look like bargains. And the ongoing earnings season could serve as a catalyst that gets these stocks climbing again, at least in the short-term, they say. “This is the most opportunity I’ve seen since Q3 of ’08, so I would say it’s foolish to completely ignore any sector — let alone technology — just because of macro headwinds,” said Paul Schatz, founder and president of Heritage Capital. Since the start of 2022, the tech-heavy Nasdaq Composite has plummeted 32% as investors worried the Fed’s hawkishness would slow economic growth and send the economy into a recession. Even shares of big technology giants — Amazon , Microsoft and Alphabet — are more than 30% from their highs, with Meta Platforms and Netflix down more than 61% each. Still, investors need to remember that not every battered name is an opportunity. Further losses could come as the economy slows and sales dry up. Snap’s more than 30% dive Friday on another disappointing quarter only underscores the dangers that linger. The Snapchat parent predicts no revenue growth for the current period and the news sent stocks tied to advertising like Pinterest tumbling Friday. When stock picking in this environment, some investors point to companies with lower price-to-earnings ratios relative to recent history and defensive names like IBM , which gained nearly 5% on Thursday after surpassing estimates on the top and bottom lines and boosting its revenue guidance for the year, as some of the best ways to get in on the sector. Here are the ideas they shared with CNBC Pro. The hunt for attractive valuations Looking at a company’s price-to-earnings ratio and how current trading compares on a historical basis can help investors pick where to buy. The multiples on many big tech stocks have come down in recent months amid the market shakeup. Citi U.S. Equity Strategist Scott Chronert recently upgraded the information technology sector to overweight, saying that the S & P 500 requires growth and technology leadership if it hopes to take a leg higher, and growth has outpaced value since June’s low. “The high-level perspective is that the Tech sector (and Growth side of the S & P 500) have borne the brunt of multiple compression related to the sharp move higher in both nominal and real interest rates earlier in the year,” he wrote in a note to clients. “In turn, we expected that any perceived peaking in Fed rate expectations would trigger valuation relief on the sector.” While Oakmark Funds typically looks beyond traditional PE to value technology stocks, portfolio manager Bill Nygren points to a slew of attractive forward PE multiples in the space like Oracle , which is trading at roughly 14 times next year’s earnings compared with an average of 27.4 times over the last five years. Netflix , too, has come down to a forward PE of about 26 times, from a five-year average of 95 times. The stock, which had been trading at nearly 54 times in December 2021, has fallen about 55% this year. Nygren has stood by the company throughout this downturn and he said he expects the stock to reignite revenue growth as it launches its ad-supported tier. Earlier this year, Netflix’s streaming dominance showed cracks as it reported two consecutive quarters of subscriber losses. Sentiment seemed to shift Tuesday as it added 2.4 million subscribers in the third quarter and revealed more information on the company’s attempt to stop password-sharing. The news boosted shares by more than 16% this week. Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said the downdraft in names like Salesforce and chip stocks Nvidia , Qualcomm and Broadcom offer enticing opportunities for young investors looking to get ahead for the long-term. “You can’t wait for the market to get a sense that the economy is turning because at that point it will be too late,” he said. Citi’s Chronert said in a recent note that he also expects a sentiment shift in the chip sector in the coming months. “In the case of Semis, we appreciate that a positive fundamental turn may still be several months off,” he said. “But, our proprietary valuation model gives us motivation to be early in turning incrementally more constructive.” Nvidia is one of those chip stocks that’s dropped sharply from its highs. It trades at a forward PE of roughly 36 times, down from 59 times in January. While investors have come to view Nvidia and its gaming segment as a play for the future metaverse and artificial intelligence, near-term trouble has persisted as demand slowed for its gaming graphics cards . The stock is down more than 58% this year, as the company slashed its forecasts. But Nvidia CEO Jensen Huang told CNBC in September that he is optimistic about the company’s next-generation graphics cards , which should sell well once inventory levels normalize. The next round of earnings reports will give investors a better sense of demand and how companies are managing through the current conditions. Given the Federal Reserve’s stance, investors need to focus on earnings and dividends when searching for value, said Cresset Capital Chief Investment Officer Jack Ablin. “Without cheap money, we can’t rely on valuation expansion anymore,” he said. His picks include names that boast quality balance sheets and consistent dividends, including Apple , Microsoft, Texas Instruments , and Visa . Looking outside of big technology Still, in this volatile market, many investors say some of the best values exist outside the quintessential big technology names. Schatz of Heritage Capital looks for what he calls “high-flier” or “second-tier” technology stocks severely battered this year but pushing higher. That includes Yelp , which was up about 2% this year, and roughly 41% off its 52-week low in July, as of Thursday’s close. The advertising stock continues to make new highs despite fears of a pending ad recession. It has gained more than 9% in October alone. It also trades at one of the higher forward PE ratios of the group at more than 46 times. Yelp’s second-quarter revenue rose 16% year over year, and was up 8% from the previous quarter. Growing demand in its services categories has helped support its revenue. Schatz also pointed to Wix . Activist investor Starboard Value has taken an interest in the Israeli software company. Reuters reported that Starboard is talking with Wix about ways to improve operations, margins and profitability. The provider of web development software had risen in popularity during the pandemic as increased e-commerce activity boosted demand. More recently growth has slowed , forcing the company to lay off workers. “You just don’t see activism in companies that may not exist,” Schatz said. Playing defense When looking outside of big tech, investors may also want to consider looking out for more defense-focused names. While the sector isn’t typically synonymous with defense, some names do take on protective qualities that can insulate investors in the times ahead, said Randy Hare of Huntington National Bank. His picks include IBM, which trades at just 14 times forward earnings and offers a sticky revenue base. Ongoing macro themes also influence Hare’s picks. He highlights a strong labor force and high-interest rates as potential benefits for payroll processor ADP . How investors pick tech stocks should also depend on their time horizon. For investors closer to retirement, Pavlik recommends Jack Henry & Associates , a provider of back-end technology support to many banks, that is up more than 11% since January. “‘That name is never going to go away,” he said. “Maybe a financial institution would look to get a cheaper price from a similar firm but in order to stay competitive these banks need to outsource that.” Another recommendation is cybersecurity company Palo Alto Networks , which benefits from a need for companies to protect their IT systems. Its stock is down 13% this year. Eyes on earnings season Gene Munster of Loup Ventures expects earnings season to provide a long-awaited bounce for tech stocks in the weeks ahead. While Munster said the market hasn’t hit the bottom just yet and he retains a third of his portfolio in cash, he points to stocks closely tied to the consumer and everyday life as some companies positioned to do well in the near term. That includes Meta Platforms , down about 61% this year and trading at 13.4 times forward earnings, as an integral part of the consumer’s social media orbit. Another likely winner is video game maker Take-Two Interactive , which he says benefits from consumers’ gaming addiction and a massive upgrade ahead to its beloved Grand Theft Auto franchise. The stock trades at about 25 times forward earnings, compared with a five-year average of about 48 times. Should the market move up on earnings, Munster also expects once high-flying and heavily shorted Covid-19 names like Peloton to rise due to short squeezes. Many post-earnings bounces this year have come from companies beating on lowered forecasts, Dan Niles of the Satori Fund told CNBC’s “TechCheck” this month. Investors “mistakenly” have come to believe this means the market has hit a bottom or that a sell-off signals a company is a good buy, he said. Niles expects to see a repeat of that as earnings season continues. “In some ways, it’s counterintuitive, but the worse the guidance is, the more likely the market is going to mistakenly have a bear market rally and then you are going to figure out the numbers are still too high when we get to the end of the fourth quarter, and we’re going to be back in the soup again,” he said. For this and other reasons, Independent Solutions Wealth Management’s Paul Meeks cautions investing ahead of a report. He does recommend names continuing to raise revenue even in a recession. That list includes little-known software stocks Harmonic and Aspen Technology , which are trading at roughly 30 times and 36 times forward PE, respectively. Both stocks are reasonably valued and continue to grow their top and bottom lines although they boast smaller market caps than most pure-play tech names, he said. In a separate interview with CNBC’s “The Exchange” this month, Meeks called the communications equipment provider Harmonic a “safe haven in the tech storm” because it has consistently provided strong EPS beats. Shares are up more than 23% this year. Despite finding some opportunities in the space, Meeks said he is stepping away from making any further tech investments at least until earnings season clears as he suspects markets have not hit a bottom just yet. Investors interested in the space should at least wait to buy a stock until after it’s posted results given the rampant post-earnings volatility in recent seasons, he said. Despite the dour near-term outlook, Schatz recommended investors begin taking small positions ahead of a fresh bull market. “There will not be an all clear sounded,” Schatz said. “By the time most people realize the tech bear market is over, these stocks will be up 20%, 50%. Take smaller positions and literally start buying them now.”
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