Chip stocks, discounted software stocks and reopening plays are three types of tech companies that could hold up well if recent market rotations away from frothier names that are up sharply over the last 12 months, and into value and cyclical names, lasts more than a short while.
To be sure, a lot of those frothier names rebounded sharply from Tuesday to Thursday, after getting hammered over the prior three weeks. And the pending arrival of $1,400 stimulus checks might just drive additional gains for some of these companies over the next week or two.
But there are good reasons to think that the rotation is far from done -- ones that go beyond the fact that a lot of the high-multiple names still have valuations that range from steep to bubble-like based on any realistic appraisal of their likely future cash flows.
Bond yields (and with them, discount rates for equities) continue rising, as markets come to grips with the impact of both a $1.9 trillion stimulus bill and -- following 12 months during which personal savings rates have been quite elevated -- all of the services spending that's likely to be unleashed by reopenings. And with 3-year and 5-year Treasury yields still only at 0.34% and 0.84%, respectively, a good case can be made that bond markets still haven't fully priced in the inflation growth that could happen over the next year or so.
In addition, the macro improvement that looks poised to come with reopenings is arguably weakening the "flight to safety" argument for buying expensive names delivering strong top-line growth. In an environment where a large variety of companies are registering double-digit revenue and EPS growth, the scarcity premium assigned to companies registering strong growth since March 2020 is bound to diminish.
If a rotation from high-multiple COVID winners towards low-multiple and cyclical names continues, it's not hard to envision many chip stocks holding up fairly well. The current boom cycles being enjoyed by chip developers and equipment makers appear to be far from over, with many firms forecasting over the last six weeks that demand will remain strong through year's end, and quite a few of these companies still have forward P/Es below 20. Last week, I highlighted five chip stocks that I thought are worth a look -- Micron (MU) , Western Digital (WDC) , Ultra Clean Holdings (UCTT) , Cohu (COHU) and Marvell Technology (MU) -- but there are a slew of others that could also do well amid a rotation.
Reasonably-priced software stocks could also do well. Though SaaS firms have been seen as safe-haven plays over the last 12 months (and often given sky-high valuations along the way), the fact remains that unlike, say, e-commerce or gaming, there's little risk that spending growth for most types of enterprise software will significantly cool amid reopenings. Indeed, growth rates for many software firms could actually accelerate thanks to higher spending among companies in COVID-impacted industries, and (as hundreds of billions in stimulus funds are provided to schools and state and local governments) among education and government clients.
That, together with ongoing enterprise software M&A activity, provides a bull case for not-too-expensive software stocks that are posting double-digit growth. Names that fit the bill include Alteryx (AYX) , Dropbox (DBX) , Splunk (SPLK) and Tenable Holdings (TENB) .
Finally, while reopening plays have generally rallied over the last couple of months, I think markets are still underestimating just how much of a surge there could be in travel and hospitality spending in the coming months. Just as few predicted a year ago how much sales of game consoles, board games and baseball cards (just to give a few examples) would soar during the pandemic, it's still probably underestimated how much consumers (aided by stimulus money and a year of higher-than-normal savings) are likely to spend on all the things that they've been unable and/or scared to do during the last twelve months.
Along with benefiting many, many, non-tech companies, this spending surge should be a boon for online travel plays such as Booking (BKNG) , Expedia ( EXPE) and (though its steep multiples are worth keeping in mind) Airbnb ( ABNB) . Others poised to benefit include ride-hailing firms such as Uber ( UBER) and Lyft ( LYFT) and Internet services firms that get much of their revenue from local businesses, such as Yelp ( YELP) , Groupon ( GRPN) , Eventbrite ( EB) and ANGI Homeservices ( ANGI) .
