Even as the record busting market rally takes a pause, it may be a good time to take stock of the factors powering it in the first place. Initially met with trepidation, Trump’s electoral victory infused new vigor into the bourses. His promises to reduce taxes and regulatory requirements have been greeted with great enthusiasm by industry at large, helping to propel stocks higher.
Going by current performance, it seems tech stocks have come out ahead of all others during the rally. Despite concerns regarding overvaluation; bright prospects, upbeat earnings and strong economic conditions are helping the sector climb higher. Picking tech stocks seems to be a lucrative proposition at this point. This is especially true for those which are among the top gainers during this period.
Tech is the Leading S&P 500 Sector YTD
The Technology SPDR (XLK) has gained 9.1% year-to-date, emerging as the leading gainer among the 10 S&P 500 sectors. In comparison, the S&P 500 itself has gained 5.8% over the same period. The technology heavy Nasdaq has gained 8.4% during the year-to-date timeframe.
Tech heavyweights have been powering gains for the sector.
In particular, FANG stocks have notched up average gains of around 13% year-to-date, adding $155 billion to their collective market value.
On an individual basis, Facebook Inc (FB), Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX) and Alphabet Inc (GOOGL) have gained 19.3%, 12.8% 14.2% and 7.4%, respectively during the year-to-date period. Apple Inc. (AAPL) has gained more than 20% over the same period.
Trump’s Victory Provides Boost, Outlook Bright
On the campaign trail, Trump promised to cut taxes, reduce regulations and allow the repatriation of corporate funds held overseas. The tech sector is likely to be a major beneficiary of such policy changes, given that several tech heavyweights have substantial funds parked overseas. Meanwhile, the promise to cut corporate tax rates from 35% to 15% is likely to increase the attractiveness of the U.S. as a business destination and free up funds for investment purposes.
Tech companies are likely to utilize such surplus funds to invest in key trends which are dominating the sector’s landscape. This includes areas such as the Internet of Things (IoT), cloud computing and automation of production facilities. The IoT phenomenon has necessitated the rapid introduction of related devices across homes, workplaces and production facilities, leading to an unprecedented increase in the demand for computing power needed to collate and analyze such data.
Meanwhile, market research company IDC has estimated that expenditure on cloud computing will increase by 21.5% up to 2020. This is nearly seven times higher than average projected spending on information technology as a whole.
What’s Offsetting Valuation Concerns?
With the market rally continuing over a considerable period of time, valuation multiples of nearly all major sectors are lingering near their long-term averages. In the case of technology, the price to sales TTM is at 3.12, well above its median value of 2.46 and extremely close to its five year high of 3.15. Only in a 10-year timeframe is a favorable comparison available, since in this case the high is at 13.24.
But investors have been ignoring this lingering fact and have chosen to focus on recent positives. For instance, the sector delivered stellar fourth quarter earnings growth. As of Feb 17, total earnings for tech companies making up 88.5% of the sector’s total market cap were up +8.7% from the same period last year on +6% higher revenues, with 74.1% beating EPS estimates and 74.1% beating revenue estimates.
Among the encouraging earnings results have been those from semiconductor companies. The likes of Broadcom Ltd (AVGO), Applied Materials, Inc. (AMAT) and Skyworks Solutions Inc (SWKS) have all posted upbeat earnings results or released positive projections for the future. On Feb 3, shares of Micron Technology, Inc. (MU) gained 3.5% after it raised its forecast for 2017 on rising demand for its memory chips.
Despite the brief hiatus, stocks are likely to move northward shortly. The fundamental catalysts behind market gains, especially economic strength, remain firmly in place. In such a situation, it is likely that the tech sector will take the lead once again since there are several factors working in its favor.
Adding tech stocks to your portfolio, especially those which have gained substantially in recent times, seems to be a prudent option at this time. However, picking winning stocks may be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.
Rocket Fuel Inc (FUEL) is a leading provider of artificial intelligence advertising solutions for digital marketers.
Rocket Fuel has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 12.9% for the current year. Its earnings estimate for the current year has improved by 20.6% over the last 30 days. The stock has returned 82.5% year-to-date, outperforming the Zacks Internet – Software Market sector, which has gained 6.1% over the same period.
Sierra Wireless, Inc. (USA) (SWIR) is a leading provider of intelligent wireless data communications products.
Sierra Wireless has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. Its earnings estimate for the current year has improved by 63.3% over the last 30 days. The stock has returned 82.5% year-to-date, outperforming the Zacks Wireless Equipment Market sector, which has lost 4% over the same period.
Ichor Holdings Ltd (ICHR) is engaged in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment.
Ichor Holdings has a VGM Score of B. The company has expected earnings growth of 32.8% for the current year. Its earnings estimate for the current year has improved by 1.3% over the last 30 days. The stock has returned 72.2% year-to-date, outperforming the Zacks Electronics – Semiconductors Market sector, which has gained 15.3% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
KEMET Corporation (KEM) along its subsidiaries is the world’s largest manufacturers of solid tantalum capacitors and one of the world’s largest manufacturer of multilayer ceramic capacitors.
KEMET has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. The stock has returned 71.2% year-to-date, outperforming the Zacks Electronics – Miscellaneous Components Market sector, which has gained 10.9% over the same period.
Scientific Games Corp (SGMS) is the leading integrated supplier of instant tickets, systems and services to lotteries, and the leading supplier of wagering systems and services to pari-mutuel operators.
Scientific Games has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 35% for the current year. Its earnings estimate for the current year has improved by 6.6% over the last 30 days. The stock has returned 54.3% year-to-date, outperforming the Zacks Computer – Services Market sector, which has gained 2.3% over the same period.
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