Tech stocks: What Wall Street experts recommend in a bear market
Tech stocks have regained some of their mojo – at least for now. Some of the battered tech-related names have rebounded since the market’s last low on June 16.
In our series “What to do in a bear market“ Yahoo Finance is reviewing Wall Street analysts’ recommendations on tech-related holdings – amid a slowing economy and Federal Reserve moves to curb inflation.
On Wednesday, the central bank announced a rate hike of 75 basis points. Fed Chairman Jerome Powell said interest rates had reached neutral and the Fed would be “data dependent” going forward, essentially throwing forecasts out the window. Risk assets rallied on Powell’s unscripted remarks.
“This week’s rally in risk suggests that investors are betting that the Fed’s future moves will be more modest,” noted Yahoo Finance’s Jared Blikre recently.
Despite a recent rebound, communication services and technology stocks are two of the most lagging sectors in the S&P 500 year-to-date (behind consumer discretionary).
So what should investors do if they own tech-related stocks? We asked the experts.
“The big, big bet on technology is basically that real rates and longer-term real rates in the United States are going to stay pretty benign and pretty low,” said Max Kettner, chief multi-strategist recently. HSBC assets at Yahoo Finance Live.
“This is also our base case. So that means the environment we have right now is pretty conducive to growth away from value – away from that kind of shorter duration, [for example ] financials – to more types of growth stocks,” he added.
“At the end of the day, it’s really about the valuation there, and the valuation there is mainly really a function of what happens with longer-term real rates, and that, as we know, is a function of Fed policy,” he continued. .
“If the Fed can’t really raise rates much further, then tech seems like a pretty decent place to hide, in conjunction with the larger growth universe,” Kettner added.
What tech stocks can you keep in a portfolio?
David Trainer, CEO of New Constructs, said: “Investors need to be selective when choosing stocks in the technology sector. The strongest types of stocks are those where cash flow is strong and valuations underestimate the company’s ability to generate cash flow in the future.
He said his companies’ favorite tech stocks were Microsoft (MSFT), Alphabet (GOOGL), Cisco (CSCO) and Oracle (ORCL). “Our advice to tech stock investors is to know what you’re buying and have a clear understanding of the company’s ability to generate cash flow,” he added.
“It is important that investors do their homework – diligence matters. Betting on stocks to keep rising just because they have risen in the past is no longer a reliable strategy,” Trainer said.
What about social media platforms like Meta (META), which is down 52% since the start of the year?
Brent Thill, an equity research analyst at Jefferies, joined Yahoo Finance Live after Meta’s quarterly results. “Stock is cheap. Negativity is insane,” he said.
“There’s really no catalyst for ad names,” Thill said. “As long as the broader macroeconomic environment is difficult, these names will not work in the short term.”
He added that patient long-term investors at this multiple will benefit. “In the short term, I think the tech is in a very tough spot for the next six months until we get clarity on what the 23 numbers look like,” he said.
The social media platform’s CEO, Mark Zuckerberg, recently warned that “the economic downturn will have a broad impact on the digital advertising industry.” Meta, formerly known as Facebook, had previously faced challenges as iPhone maker Apple’s iOS privacy changes made it harder for the company to target ads.
“It’s much harder for ad-focused names,” Thill said. “I think in the meantime, the dollars will continue to go up to Google on the big platforms, the companies that have big cash flow.”
Do some tech stocks perform better than others in a downturn?
For John Freeman, vice president of equity research at CFRA, the answer is clear. “If you have at least a four-year horizon…the software just screams YES. It’s the place to be,” he told Yahoo Finance.
“Software is eating the world,” he added. “If we have a stressful economy in a downturn, you’ll have good software and you’ll have bad software. And good software is obviously cloud-based software, or those companies that are now over 50% cloud-based,” added the analyst.
“In an economic situation, you go more digital, you lean into it. This is what we have seen happen before. And I don’t understand why this time will be different,” Freeman said.
“Here’s the other thing about all these cloud companies, they’re inherently very profitable,” he said.
He also prefers software to hardware – or even electric vehicle giant Tesla (TSLA), which some investors see as a tech company.
“[Tesla] has a lot of software in there…but it sells cars. There is a gross margin to this. There is a nomenclature,” he added. “I think Tesla is a great company. I’m not making a call on the stock, but…software companies are looking so much better right now.”
Is it wise to cling to unprofitable tech companies during Fed tightening cycles?
Many unprofitable tech companies have done very well in 2020 and 2021, only to see their pandemic gains evaporate.
“Fed tightening cycles are not good for speculative tech names,” Hue Roberts, head of analysis at Quant Insight, told Yahoo Finance. “Qi has been bearish on unprofitable tech throughout 2022.”
Roberts highlighted Cathie Wood’s ARK Innovation ETF (ARKK). Some of the holdings in the exchange-traded fund include unprofitable tech companies that have outperformed during the pandemic.
“The chart below shows ARKK as a benchmark for the sector. The red line indicates the value of the Qi macro collateral model. It has trended lower throughout the year. Macro conditions have deteriorated,” Roberts said. .
“This week, the market interpreted the Fed as pivoting in an accommodative direction. To the extent that this helped ease financial conditions (falling real yields, tightening credit spreads), it helped ARKK rebound. But we would like to see the red line move to new highs to break the downtrend and signal the green light,” Roberts said.
Ines is an equity market reporter. Follow her on Twitter at @ines_ferre
Click here for the latest stock market news and in-depth analysis, including events moving stocks
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app to Apple Where android
Follow Yahoo Finance on Twitter, Facebook, instagram, Flipboard, LinkedInand Youtube