Wall Street has been suffering since Black Friday as the resurgence of coronavirus with its new variant – Omicron – has shaken market participants’ confidence across the globe. As of now, very few data are available to gauge the severity of the new variant and doctors and medical scientists have not given any definitive guidance. However, Omicron has been found in more than two dozen countries, the latest one being the United States. As a result, panic selling has struck Wall Street again.
At this stage, it will be prudent to buy technology stocks on the dip. The technology sector has a secular uptrend potential due to its inherent innovative strength. In the pandemic-stricken era, this sector has proved to be a safe-haven for investors. We have selected five such stocks with a favorable Zacks Rank. These are — EPAM Systems Inc. EPAM, PTC Inc. PTC, Lattice Semiconductor Corp. LSCC, VMware Inc. VMW and Pinterest Inc. PINS.
Technology Sector – the Least Sufferer
The Omicron-led stock market volatility started on Nov 26, which was Black Friday. In the last four trading sessions, the Dow — which leans toward cyclical stocks — and the market’s benchmark the S&P 500 Index tumbled 5% each. However, the tech-heavy Nasdaq Composite slid 3.7% in the last four days. The Technology Select Sector SPDR (XLK) — one of the 11 broad sectors of the S&P 500 Index — fell just 2.3% in the same period.
The technology sector suffered the least due to Omicron. This is important considering the fact that on Nov 30, in his testimony to a Senate committee, Fed Chairman Jerome Powell said that the central bank will discuss speeding up the pace of bond-buy tapering, hinting at an earlier-than-expected hike in the benchmark interest rate. A rate hike is perceived to be unfavorable for growth-stocks like technology. Yet the sector has suffered the least in the ongoing market turmoil.
Technology is the Best Bet in the Long Term
We must not forget that the growing demand for hi-tech superior products has been a catalyst for the sector in an otherwise tough environment. A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, has given a boost to the overall space.
The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared with the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features since voice communication and not data serve most of their needs. Even those, who are using smartphones, rarely utilize the online digital features.
However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. People were not entirely used to digital platforms for doing office work, ordering food and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential. The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons for the other countries.
Our Top Picks
We have narrowed our search to five technology stocks that are currently trading on the dip. These stocks have strong growth potential for the rest of 2021 and have witnessed solid earnings estimate revisions within the last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past month.
Image Source: Zacks Investment Research
PTC Inc. operates as a software and services company in the Americas, Europe, and the Asia Pacific. PTC is witnessing robust adoption of Vuforia-Chalk, Vuforia Expert Capture solution along with ThingWorx and Windchill platforms as well as the Onshape suite. The acquisition of Arena Solutions bodes well.
PTC is accelerating the software-as-a-service (SaaS) transition by improving the capacity on its Atlas platform and boosting SaaS capabilities of its core computer-aided design and product lifestyle management products.
Zacks Rank #1 PTC has an expected earnings growth rate of 5.5% for the current year (ending September 2022). The Zacks Consensus Estimate for current-year earnings improved 6.9% over the last 30 days. PTC is currently trading at a 29.2% discount to its 52-week high.
Pinterest Inc. is benefiting from user base expansion boosted by coronavirus-led social distancing norms. The availability of features like Today and Shop tab for Pinners are key catalysts for PINS.
Enhanced product offerings, new conversion insights, wider Pinner and advertiser base, simplified ad systems through Verified Merchant Program and Pinterest Partners Program for small businesses and improved advertisers’ ability to measure the effectiveness of their ad spend are expected to aid advertising revenues of Pinterest in the near term. Growing Gen Z and millennial user base is a major growth driver.
Zacks Rank #2 Pinterest has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 3.8% over the last 30 days. PINS is currently trading at a 58.5% discount to its 52-week high.
Lattice Semiconductor Corp. develops and sells semiconductor products in Asia, Europe, and the Americas. LSCC offers high-performance programmable logic devices and related development system software. Programmable logic devices are standard semiconductor components that can be configured by the end customer as specific logic functions, enabling shorter design cycle times and reduced development costs.
Zacks Rank #2 Lattice Semiconductor has an expected earnings growth rate of 47.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 7.4% over the last 30 days. LSCC is currently trading at a 12.8% discount to its 52-week high.
EPAM Systems Inc. is benefiting from the ongoing digital transformation and continued focus on customer engagement and product development. EPAM is benefiting from growth across all geographies and multiple industry verticals. Digital transformation, focus on customer engagement and product developments have been key catalysts for EPAM Systems. Acquisitions and partnerships are aiding top-line growth.
Zacks Rank #2 EPAM Systems has an expected earnings growth rate of 38.5% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.5% over the last 30 days. EPAM is currently trading at a 18% discount to its 52-week high.
VMware Inc. is benefiting from strength in subscription and SaaS revenues. VMware Cloud Provider Program, end-user computing, and VMware Cloud on AWS offerings are some of the major top-line contributors.
VMW is well-positioned to benefit from the ongoing cloud-based digital transformation and acquisitions like Carbon Black and Pivotal. Solid demand for the Tanzu platform across key verticals including financial services bodes well. VMware’s widening cloud customer base is a key catalyst.
Zacks Rank #2 VMware has an expected earnings growth rate of 1.9% for next year. The Zacks Consensus Estimate for current-year earnings improved 1.7% over the last 7 days. VMW is currently trading at a 33.7% discount to its 52-week high.
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