After Yield-Curve Inversion, Tech Stocks Look Promising -- Update
August 16 2019 - 05:50PM
Dow Jones News
By Michael Wursthorn
Technology stocks are up 26% this year, and some Wall Street
analysts say the sector is a good refuge following worrying signs
from the bond market.
But it all depends on where in tech investors put their
money.
Tech stocks have a history of outperforming the broader market
following a yield-curve inversion, analysts at Bank of America
Merrill Lynch say. Since 1965, the sector, on average, beat broader
benchmarks in the 12 months following such an event. So far this
year, the S&P 500 is up 15%.
That history offers hope to investors after yields on the
10-year U.S. Treasury notes briefly fell Wednesday below two-year
yields. That type of inversion, the first since 2007, has been one
of the stock market's most reliable signals of a recession since
1978, and it has investors and analysts alike scrambling to
rejigger portfolios in case the economy starts sputtering.
Bank of America's analysts highlight Vanguard's Information
Technology exchange-traded fund for its low expense ratio and price
momentum. In addition, the fund carries a lower exposure to the
beleaguered semiconductor industry.
As one looks deeper into tech, IT-services stocks have fared the
best, rising 32% this year. That is no surprise as several
companies in the group have reported some of the strongest earnings
results for the second quarter. PayPal Holdings Inc., for example,
increased earnings by 47% from a year earlier, while Automatic Data
Processing Inc.'s profit grew 22%.
Both stocks are up more than 26% on the year and have mostly
weathered the latest bout of volatility.
But that performance comes at a premium. IT-services stocks look
pricey, trading at 22 times earnings projected over the next 12
months, near the group's highest levels in years and well above the
broader tech sector and the S&P 500.
Only software stocks, which have risen nearly 29% this year, are
more expensive, with a forward-looking P/E multiple of 24.
Among the cheapest, but also the riskiest amid trade tensions
and signs of economic weakness, are semiconductor stocks. They
trade at 14 times their earnings. Second-quarter earnings have
pulled back about 28% from a year earlier, and third-quarter
earnings could contract even more, with analysts estimating a 30%
pullback.
One bright spot is Nvidia Corp. The chip maker reported solid
earnings thanks to a boost from gaming and raised its forecast for
the year, sending shares up 7.3% on Friday. The stock is up nearly
20% year-to-date and analysts at Bank of America say the company
has the potential to rise another 41%.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
August 16, 2019 17:35 ET (21:35 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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