The dog days of summer have most investors thinking about the historically volatile months of September and October, which may indeed follow their seasonal patterns. With that on the brain, we decided to look at sectors that are historically strong from August through December.
And tech stocks are near the very top of the list.
Over the past 19 years, tech stocks — as measured by the Technology SPDR (ETF) (NYSEARCA:XLK) — have shown strong performance into year’s end. Given the current strength in the sector there is evidence to suggest that we will see this seasonality trend play out once more in 2016.
Following our quantified model, we’ve identified seven XLK components that are ranked as market outperformers. Or, in terms you’ll like even better, these are tech stocks that we see as having 10% or more upside by the end of the year.
Tech Stocks That Will Pop: Citrix Systems (CTXS)
Potential Upside for CTXS: 15%
Networking company Citrix Systems, Inc. (NASDAQ:CTXS) is one of the relative strength leaders in the tech sector. Both the charts and fundamental picture look strong here.
From a technical perspective, Citrix shares are in strong long- and short-term bullish trends. As of now, CTXS is trading well above its 20-month moving average, which has been trending higher, indicating a strong technical trend.
Our models identify Citrix as an undervalued stock due to a sheer lack of attention from the market. Meanwhile, short interest on CTXS shares stands at a whopping eight times their daily average, suggesting a short covering rally is likely to propel the stock higher as it moves to new all-time highs soon.
Watch for Citrix to move to the $100 mark on the next long-term move.
Tech Stocks That Will Pop: Alibaba (BABA)
Potential Upside for BABA: 11%
Alibaba Group Holding Ltd (NYSE:BABA) is the talk of the market right now after positive earnings results. The market once turned away from Alibaba shares because of the fear surrounding economic stalling in China. Now, with the picture not looking so dire, we should expect that the market will warm to BABA.
Alibaba’s chart sure looks pleasant. The stock moved into a long-term bull market trend last month to break above its 20-month moving average. And like Citrix Systems, Alibaba shares are now benefiting from pessimistic sentiment “unwinding,” which results in BABA shares climbing the “wall of worry” as the crowd begins to turn bullish and buy the stock.
With shares now trading above $90, we expect to see a short-term pullback as traders cash out on some profits. That in turn should create an opportunity to buy a dip in the short-term future.
When that happens, strike — that’s your opportunity to ride Alibaba back over $100 for the first time since June 2015.
Tech Stocks That Will Pop: International Business Machines (IBM)
Potential Upside for IBM: 16%
Big Blue has been seeing green lately.
International Business Machines Corp. (NYSE:IBM) has been successful in reinventing its business line to new technology needs. IBM was all but thrown out by investors and analysts — the very same people that now must take note of the company’s turnaround. IBM shares are trading back in a bull market trend for the first time since 2013.
From a shorter-term perspective, the stock is finding consistent support at its 50- and 200-day moving averages, which are now trending higher, indicating that an intermediate-term bull run is in effect.
A paltry 27% of Wall Street analysts covering IBM recommend the stock as a buy right now, while 19% have sell ratings. Remember: This is a high-profile Dow Jones Industrial Average component, which means analysts can’t afford to be on the wrong side of a long-term move.
Expect to see the next quarter’s earnings shoe more improvement and serve as a proving ground that will cause Wall Street to warm up to shares. The technical trend and upgrade potential will help IBM hit the $190 region.
Tech Stocks That Will Pop: Western Union (WU)
Potential Upside for WU: 10%
Most investors don’t consider The Western Union Company (NYSE:WU) as a tech company, but its electronic payment services are actually in a very hot spot right now. With electronic transactions growing, Western Union’s place in the market has strengthened, improving WU’s bottom line.
The fundamental improvements have resulted in a strong technical picture that has seen the stock rally strongly from its 2012 bottom when investors wrote the stock off. The market still hasn’t realized the strength, though — only 19% of the analysts tracking the stock rank it a buy, and the short sellers have increased positions to an extremely high level. These factors indicate that WU, too, is climbing the wall of worry.
After testing their 20-month moving average, Western Union shares are trending toward the $23 level, their highs since May 2015. The bears out there will realize that the stock is moving against them and turn into buyers, moving shares beyond $23 before year’s end.
Tech Stocks That Will Pop: Electronic Arts (EA)
Potential Upside for EA: 15%
Electronic Arts Inc. (NASDAQ:EA) is heading into the holiday season and the new software releases that bolster sales. This makes the gamemaker a seasonal favorite for traders.
We’ve watched EA shares hover just under resistance at the $80 mark. The upcoming earnings and product releases — in the next few months, we’ll see Fifa 17, Titanfall 2 and Madden NFL 17 — should propel EA shares above this resistance and into a new bullish trend.
Sentiment toward Electronic Arts is somewhat bearish, as the short sellers are heavily betting against a break higher. Recent short interest data shows that almost 10 times the average daily volume is tied up in bearish EA bets. But expect a break higher to shake the shorts loose — short sellers will have to buy to close their positions, and that will only further drive EA shares north.
Our model currently ranks Electronic Arts shares a strong buy with a target of $90 over the next four months.
Tech Stocks That Will Pop: Paychex (PAYX)
Potential Upside for PAYX: 10%
Similar to Western Union, Paychex, Inc. (NASDAQ:PAYX) belongs in this list of tech stocks because of its electronic processing of payroll and payroll service for companies. Paychex is benefiting from growth in the jobs market, which obviously fuels better revenue and earnings.
At 28 times earnings, PAYX shares seem overvalued, but remember that overvalued can always become more overvalued.
Paychex’s charts are incredibly strong for PAYX as the shares have remained in a long-term bullish trend since 2011. Less than 10% of the S&P 500 can claim that! Despite this strength, only 10% of Wall Street’s analysts rank the stock a buy. Again, this puts PAYX in another rare category in the S&P 500, as the average stock within the index has at least 50% of recommendations leaning toward buying.
This stock will benefit from a change of heart by the analyst community as we should see upgrades from hold to buy on any opportunity, especially around the next earnings season. Our model ranks PAYX a buy with a target of $66 before year-end.
Tech Stocks That Will Pop: Nvidia (NVDA)
Potential Upside for NVDA: 18%
Nvidia Corporation (NASDAQ:NVDA) is something of a wild card, as it reports earnings on Thursday, Aug. 11. So a lot is going to hinge on what happens after its report.
The semiconductor company has been tearing it up, as shares have improved by more than 140% in just a year! Normally we would be cautious about such a strong run, but Nvidia’s fundamental picture is just so darn good — the company keeps expanding into new product lines, which we like — that it supports ever higher valuations.
The chart for Nvidia has gone parabolic, going from $35 to almost $60 in the last four months, and the stock is setting all-time highs seemingly every day. While we think NVDA shares could see a short-term pullback, we would view it as a buying opportunity. The reason: Analysts have been sitting on the sideline while Nvidia has sprinted away. At some point, Wall Street’s brains won’t want to look silly anymore, and they’ll finally issue upgrades. Those won’t just support the stock — they’ll help propel it to higher prices.
Our model ranks Nvidia as a strong buy given the fundamental and technical picture, as well as a crowd of investors that are waiting around for a chance to jump on this bull train.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.