A combination of markets pricing in slowing economic growth and rising interest rates is pinching growth and technology stocks this month, but for astute investors, the retrenchment could ultimately prove to be a buying opportunity.
It’s a matter of when, not if, technology stocks rebound, and for investors not wanting to stock pick amid the current carnage, the Goldman Sachs Innovate Equity ETF (GINN) is a prime example of an exchange traded fund that makes a lot of sense as a diversified avenue for investors wanting to position for a tech rally.
The $433.41 million GINN allocates nearly 34% of its weight to the technology sector, and the bulk of its holdings from that group are high-quality, mega-cap names, not the smaller, speculative, unprofitable companies that are really weighing on tech to this juncture in 2022.
“Growth and many technology stocks have been hit especially hard because of the long duration of their earnings. A significant part of the value of technology stocks is their future earnings profile, and as investors lower their growth expectations and/or discount those future earnings at a higher rate, the present value for these stocks falls further and faster than the broader market,” says Morningstar analyst Dave Sekera.
Sekera recommends focusing on tech companies with strong earnings visibility, robust free cash flow-generating capabilities, and pricing power, which is integral in an inflationary environment like the one investors are grappling with today.
“In addition, we are currently focusing on those that have strong pricing power and are able to pass along their own cost increases to customers in order to maintain their own margins. In this market environment, we prefer those companies with both stable cash flows and good near-term visibility into their earnings for this year, yet still have good prospects for long-term growth and large tangible addressable markets,” adds the Morningstar analyst.
Among the stocks that sport those traits and are now undervalued following the tech sell-off are Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC). Both are top 10 holdings in GINN and combine for 3.2% of the fund’s weight.
Adobe Systems (NASDAQ:ADBE), cloud computing behemoth Salesforce.com (NYSE:CRM), and ServiceNow (NYSE:NOW) are other examples of stocks highlighted by Morningstar as having the aforementioned traits and being undervalued today. All three are members of the GINN roster.
“Following the widespread sell-off thus far this year, we see a number of stocks within the technology sector that have been pushed down too far during this market rout and provide good opportunities for investors today,” concludes Sekera.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
