With so many tech stocks down 35% or more from their 52-week highs, how should tech investors looking to snap up bargains on down days proceed?
One option is to split one's tech bets into two categories:
- Profitable and relatively stable large-cap companies that look well-positioned to at least deliver moderate growth in the coming years. Along with, perhaps, some tech ETFs that contain a healthy dose of such names.
- Smaller, high-growth companies that carry more risk, but have the potential to deliver outsized returns if things go well.
With the caveat that an investor's risk appetite and goals should be taken into account when figuring out the weighting, it probably make sense for most investors to have their bets skew towards category #1. And though it might be worth waiting for a pullback following Friday's big rally, there are plenty of profitable and fairly stable large-caps that arguably have pretty attractive long-term risk/rewards right now.
Among tech giants, Amazon.com (AMZN) and Facebook (FB) -- companies that are now respectively trading at levels first reached in 2018 and 2017, and for which there are both positive and negative business impacts related to the COVID-19 outbreak -- are worth a look on a pullback. And (with business activity in China starting to return to normal) so might Alibaba (BABA) , which is around levels first seen in late 2017.
Larger, reasonably-priced chip and chip equipment firms are also worth considering. Names that fit this description and look interesting to me include Applied Materials (AMAT) , Lam Research (LRCX) , Microchip Technology (MCHP) , Micron (MU) and NXP Semiconductors (NXPI) . While COVID-19's impact on global chip demand is certainly a near-term risk for the group, supply chain-related risks have diminished over the last couple of weeks.
As for category #2, while one shouldn't go overboard making bets on smaller, high-growth/higher-risk names, it's hard to ignore the fact that giant returns have often been made in such names by those who were able to willing to buy them at moments like this (and, of course, who managed to pick some of the right ones).
While those who bought, say, Alphabet (GOOGL) or Facebook during the market's early-2016 tumble saw pretty good returns over the next few years, those who bought names such as Atlassian, Five9 and Shopify saw truly massive ones. And when the dust settles, the same will probably hold for some of the high-growth names that have fallen sharply over the last month Names that I think could end up fitting the bill over time include Pinterest (PINS) , Elastic (ESTC) , Lyft (LYFT) , PagerDuty (PD) and ANGI Homeservices (ANGI) .
Investors are definitely advised to do their own research before jumping into any particular name during a market selloff, and especially names that fit into category #2. But with that said, situations like the current one do create the kinds of buying opportunities for quality tech companies in general that only come around so often.
Alphabet, Amazon and Facebook are holdings in Jim Cramer's Action Alerts PLUS member club.
