Why investors should look beyond Big Tech
Tech stocks are showing investors how durable they can be, bouncing back from two sharp sell-offs this year to continue a dramatic surge that has seen the Nasdaq more than double since March 2020.
The Nasdaq is now up 6.6% this year, despite the wobbles caused by inflation fears. The first stumble of 2021 left the index down 4% through early March, while a second dip in early May was more mild. Most recently, the index has pushed higher.
But the rally this year has been uneven, with some leading tech companies left on the sidelines. Apple, Tesla and Netflix remain in the red. Amazon is flat. Winners include Microsoft and Facebook, which are up 13% and 20%, respectively. Google owner Alphabet has soared 35%.
With that in mind, investors are trying to figure out which of these top techs still might be worth buying — and whether there are other companies in the sector that could be good bargains too.
For investors looking to get exposure to tech, the simplest way is to buy an S&P 500 ETF. That includes Facebook, Amazon, Apple, Netflix, and Alphabet (referred to collectively as the FAANGs). Plus, Microsoft and Tesla are top holdings.
One expert said investors can’t just assume that all of the Big Techs will trade in tandem. They should also try to ignore the day-to-day noise.
“Pick your spots wisely. A lot of the headlines are already priced in,” said Karen Wallace, director of investor education at Morningstar.
Wallace noted that Morningstar analysts think Apple is fairly valued while Netflix and Tesla are overpriced. The investment research company’s analysts believe Amazon, Facebook, Microsoft and Alphabet are still attractive.
She also said that investors should start looking beyond the top techs. Morningstar recommends chip leader AMD, HR cloud software firm Workday, Big Data analytics provider Splunk and cybersecurity company Check Point Software.
Other experts are also advising investors to broaden their horizons instead of limiting themselves to the Nasdaq’s Magnificent Seven.
“For a few days, we all hate them and then for a couple of days straight, we all love Big Tech. I don’t see that tug of war ending in the short-term,” said JJ Kinahan, chief market strategist with TD Ameritrade. He added that TD Ameritrade investors are finding alternatives to the top techs.
“Chip stocks are still very popular,” Kinahan said, noting that despite concerns about the global semiconductor shortage, clients are bullish on companies like Nvidia and top chip equipment firms Applied Materials and Lam Research.
Kinahan said investors are also becoming more interested in traditional automakers as an alternative to high-priced Tesla. TD Ameritrade customers are buying more Ford and GM as both US auto giants begin to roll out more of their own electric vehicles.
Morningstar’s Wallace also said that its analysts are more optimistic about global rivals to Tesla. They are recommending Nissan and BMW.
There’s also a much larger universe of tech companies beyond those in the S&P 500.
Smaller companies often trade at cheaper valuations because they don’t have as many analysts covering them. These firms also stand to benefit more from the rebound in the US economy since they tend to have more of a domestic focus.
“The market for small cap stocks is more inefficient compared to the FAANGs,” said Brian Smoluch, a portfolio manager with the Hood River Small Cap Growth Fund.
Smoluch’s fund owns Telos, a cybersecurity software company that went public last year, power converter firm Vicor and chip firms Jabil and Kulicke and Soffa Industries.
“We’re looking for good companies at good valuations and there are plenty of them in tech that we like,” Smoluch said.
A crucial jobs report
The US jobs report for May, which will be released on Friday, is especially important because, uh, nobody knows what’s going on with the labor market.
Economists were shocked by the April report, which showed the United States added only 266,000 jobs during the month. The expectation had been for 1 million jobs, a figure that would better reflect a robust economic recovery from the coronavirus pandemic.
America is still down 8.2 million jobs from before the pandemic. A decent report on Friday could render the April disappointment a temporary blip.
There are still major questions about how the pandemic has changed the labor market. Lower income earners, women, Hispanic and Black workers bore the brunt of the pandemic layoffs and millions remain out of work. Yet some industries can’t find workers.
The May report could include clues on how policymakers should respond.
Up next
Monday: US markets closed for Memorial Day
Tuesday: US ISM Manufacturing Index; Earnings from Canopy Growth, Hewlett Packard Enterprise and Zoom Video; OPEC meeting
Wednesday: Earnings from Advance Auto
Thursday: US jobless claims; EIA crude oil inventories; Earnings from Broadcom and Lululemon
Friday: US jobs report for May; G7 finance ministers meet
