Technology stocks have tumbled in recent months amid soaring interest rates and raging inflation. The S&P 500 Information Technology index has slumped 19% this year.
So, “when is time to buy tech stocks?” Bank of America analysts ask rhetorically in a commentary.
“When clients stop asking this question,” the analysts cheekily answered. “Tech is facing the quadruple whammy of rising discount rates [which relate to cash flow analysis], peak globalization, tough comparisons and crowding.”
In any case, Bank of America clients are interested in beaten-down growth stocks, rather than cheap stocks, the analysts said. And “some beaten-down tech stocks present buying opportunities at these levels,” they said.
So the analysts compiled a list of S&P 500 tech and communications services stocks that have slipped more than 30% from their highs and have a free-cash-flow-to-enterprise value ratio above the recent 10-year Treasury yield of 2.75%.
The top five stocks on the list ranked by the size of their FCF-EV ratios, with the highest first, include:
· Qorvo (QRVO) , a semiconductor maker;
· Seagate Technology (STX) , a data-storage-equipment provider;
· Micron Technology (MU) , a semiconductor maker;
· Cisco Systems (CSCO) , a networking technology company; and,
· Qualcomm (QCOM) , a semiconductor maker.
Some household names appearing further down the list include:
· Meta Platforms (FB) (#13), the social media titan formerly known as Facebook;
· Alphabet (GOOGL) (#16), the internet search and advertising giant;
· PayPal (PYPL) (#20), the payment-tech company; and,
· Adobe (ADBE) (#26), the creative-software company.
Morningstar on Qorvo...
Morningstar analyst Brian Colello assigns no moat to the provider of wireless- and wired-connectivity products. But he puts fair value for the stock at $169, more than half again the recent quote of $112.21.
“Qorvo reported solid fiscal-fourth-quarter results, but provided investors with a predictably weak forecast for the June quarter,” stemming from “soft smartphone demand in China,” Colello wrote in a May 4 commentary.
“But we still view … Qorvo as fundamentally undervalued and still anticipate healthy 5G radio frequency chip content gains in the years.”
To be sure, Colello said he prefers narrow-moat Skyworks (SWKS) “because of its better execution over the years and its lower exposure to Chinese smartphone [makers].”
...and Seagate Technology
Morningstar analyst William Kerwin assigns no moat to the company. He puts fair value at $80, compared to a recent quote of $84.32.
“The company continues to have strong demand, but simultaneously faces inflationary pressures and supply-chain constraints,” he wrote in an April 27 commentary.
“While product demand remains high, supply issues stemming from heightened freight, logistics, and input costs are hampering Seagate’s ability to ship.”
Still, “we are encouraged by Seagate’s ability to navigate these issues and limit the impact on its margins via pricing, and we have confidence the firm can execute on its growing backlog,” Kerwin said.
The author of this story owns shares of Cisco Systems, Meta Platforms, Alphabet, PayPal and Adobe.