It’s been a year to remember for tech stocks with gains threatening to eclipse dot-com era highs. Already the highest gainer for the S&P 500, the sector’s rise has been largely fueled by Internet stocks.
As of date, the sector has, at the very least, recouped most of the losses incurred when the Web bubble burst. One gauge for tech stocks has even surpassed its dot-com era peak.
Such milestones have not gone unnoticed, giving rise to familiar questions about valuations and sustainability.
However, Internet stocks seem to be more reasonably priced now than they were in 2000. Adding such stocks to your portfolio would provide rich returns at this point in time.
Tech Stock Gains Hover Near Dot-Com High
Gaining more than 15% year to date, the Technology SPDR (NYSEARA:XLK) has eclipsed all the other sectors of the S&P 500 over this period. And the bulk of tech’s gains can be attributed to Internet stocks.
This is evident from the performance of ETFs like the First Trust Dow Jones Internet Index Fund (NYSEARCA:FDN) and the PowerShares Nasdaq Internet Portfolio (NASDAQ:PNQI) which have gained 17.2% and 25.2%, over this period.
While the first three have racked up gains of close to 30%, the search engine giant has risen in excess of 22% year to date.
According to a note released by Goldman Sachs Group Inc (NYSE:GS), Amazon, Facebook, Alphabet, Apple Inc. (NASDAQ:AAPL), and Microsoft Corporation (NASDAQ:MFST) have contributed nearly 40% of the S&P 500’s gains for 2017.
Reasonable Valuations, Strong Earnings
One metric of U.S. tech stocks has even surpassed its dot-com era records. The MSCI USA Growth index has outpaced the MSCI World Value index to the extent that the ratio of their returns has exceeded peaks witnessed during 2000.
However, analysts at Bank of America Merrill Lynch (BAML) have been quick to point out that the situation is quite different from when the dot-com bubble burst. For one, the price to earnings ratio for the global MSCI tech sector is at 18. This is considerably lower than the level of 50 experienced during Mar 2000, when the bubble burst.
Further, BAML projects earnings for the tech sector is likely to increase at a 16% pace in 2017. This is likely to go a long way toward dispelling valuation related fears. Another estimate by CFRA Research puts this year’s earnings per share growth at 13%. Such a trend was visible even during the first quarter earnings season.
As of May 18, earnings for 80.6% of the companies of the Zacks Computer and Technology Sector had increased +16.4% from the same period last year on +6.5% higher revenues, with 78% beating EPS estimates and 80% coming ahead of top-line expectations.
Our Tech Stock Pick Choices
The recent surge of tech stocks to dot-com era levels have heightened valuation related worries. But these are largely unfounded, given that stocks continue to remain attractively priced relative to dot-com era levels. Expectations for a strong earnings performance is another factor dispelling such fears.
Picking Internet stocks remains a prudent option at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Trade Desk Inc (NASDAQ:TTD) is a provider of a cloud based technology platform for advertising.
Trade Desk has a Zacks Rank #2 (Buy). Its expected earnings growth for the current year is 48.4%. Its earnings estimate for the current year has improved by 23.1% over the last 30 days.
TTD stock has returned 93.3% year to date, outperforming the Zacks Internet – Services sector, which has gained 18.4% over the same period.
Chegg Inc (NYSE:CHGG) provides a social education platform which facilities the transition of students from high school to college and ultimately to their worklife.
Chegg has a Zacks Rank #2. The company has expected earnings growth of 62.7% for the current year. Its earnings estimate for the current year has improved by 20.7% over the last 30 days.
CHGG stock has returned 61.4% year to date, outperforming the Zacks Internet – Software sector, which has gained 16.6% over the same period.
PetMed Express Inc (NASDAQ:PETS) is a major U.S. pet pharmacy, delivering prescription and non-prescription pet medications and health and nutritional supplements.
PetMed Express has expected earnings growth of 5.4% for the current year. Its earnings estimate for the current year has improved by 11.8% over the last 30 days.
PETS stock has returned 48.6% year to date, easily outperforming the Zacks Internet – Commerce sector, which has gained 34.6% over the same period. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Rapid7 Inc (NASDAQ:RPD) offers security data and analytics solutions.
Rapid7 has a Zacks Rank #2. The company has expected earnings growth of 5.3% for the current year. Its earnings estimate for the current year has improved by 7% over the last 30 days.
RPD stock has returned 49.5% year to date, outperforming the Zacks Internet – Software sector, which has gained 16.6% over the same period.
Paylocity Holding Corp (NASDAQ:PCTY) provides cloud-based payroll and human capital management software solutions for medium-sized organizations.
Paylocity Holding has a Zacks Rank #1. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by more than 100% over the last 30 days.
PCTY stock has returned 45.4% year to date, outperforming the Zacks Internet – Software sector, which has gained 16.6% over the same period.
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