The S&P 500 is off to a historically bad start in 2016, and big-name tech stocks that have relied on growth to lead the bull market higher in recent years, such as Netflix (NFLX), Amazon.com (AMZN) and FireEye (FEYE), have also led the market fall so far in 2016. This year appears to be shaping up as a year of defense and value for the tech sector, a transition that could be good news for owners of China Telecom (CHA), IBM (IBM) and Verizon (VZ).
Let’s take a look at just why that is:
The Big Rotation: From NFLX to VZ
AMZN and NFLX were the two biggest gainers in the S&P 500 in 2015, but so far this year their stocks have declined around 20%compared to the 6% decline in the S&P 500. The large sell-offs in these big-name tech stocks have led to media headlines about the tech sector dragging down the market. In reality, what the tech sector is witnessing is not a sell-off, but rather rotation out of overpriced growth stocks and into defensive value plays.
That’s where VZ, IBM stock, and CHA stock come into play.
In fact, many investors that have read about the 2016 tech stock sell-off might be surprised to learn that the Technology Select Sector SPDR (XLK) has actually outperformed the S&P 500 so far this year.
Yes, China Telecom Is a Value Stock
If you’re looking for defensive value stocks to play in a bearish or unpredictable market, there are some basic things to look for. First, try to focus on larger companies with established market positions and track records of success. Smaller companies tend to be more vulnerable during downturns than market leaders.
Second, look for stocks that are already cheap based on their P/E ratios. These stocks typically have less downside than stocks with higher multiples. IBM stock has a P/E below 10. CHA trades at 14 times earnings. And VZ boast a P/E of just 11.6.
Next, look for dividend stocks paying hefty yields. Dividends can help offset share price declines during a market downturn and are an indication of a company’s overall financial health, assuming that the stock’s payout ratio is reasonable.
Finally, look for low-beta stocks. These stocks are typically not as susceptible to volatile swings in the market.
Defensive Tech Stocks
For all those traders out there that are selling NFLX and AMZN in anticipation of further downside, here’s a Finviz screen I ran to identify some possible tech stock alternatives: technology sector stocks with a market cap greater than $10 billion, P/E and forward P/E ratios below 15, dividend of greater than 2.0%, payout ratio under 60% and beta below 1.0.
The screen returned only the three names mentioned above: CHA stock, VZ stock, and IBM stock.
Ironically, China has been at the epicenter of the 2016 market worries, but you wouldn’t know it by looking at China Telecom stock, which is now up 3.6% so far this year. VZ has done even better, surging 9.5% so far in 2016. And IBM stock has not generated positive returns so far this year, but its 3.8% decline is still much better than the overall market.
In fact, IBM stock jumped 5% in last Thursday’s session alone, following an upgrade to “Overweight” by Morgan Stanley in which the firm says it expects the “valuation disconnect to correct” for the stock in 2016.
The Bottom Line
It’s extremely difficult to predict short-term market swings, and sometimes the best you can do is invest in defensive value stocks and hope to weather the storm. As more high-growth sellers pile into defensive tech plays like IBM stock, VZ and CHA, these names could continue to provide leadership in the tech sector throughout the next phase of the market cycle.
At the time of this writing, Wayne Duggan had no position in any of the stocks mentioned.