5 Tech Giants to Buy Irrespective of Fed's Bond-Buy Tapering
We have narrowed down our search to five U.S. technology bigwigs (market capital > $100 billion) with strong growth potential for 2021. These are: AAP...
Wall Street is likely to conclude a strong August with just a day of trading left. Several economists and financial experts were concerned that August may be volatile due to the resurgence of the Delta variant of coronavirus, high inflationary pressure, lingering supply-chain disruptions and shortage of labor.
Fed Chairman Jerome Powell, in his annual Jackson Hole symposium lecture, signaled tapering of the central bank’s $120 billion per month bond-buying program. At present, the Fed is buying $80 billion of Treasury bonds and $40 billion of mortgage-backed bonds per month as a pandemic-induced monetary stimulus.
A systematic termination of bond buying will raise the yield of long-term government bonds, especially the 10-Year U.S. Treasury Note. Higher risk-free returns adversely impact the net present value of an investment in growth stocks like technology due to a higher discount rate.
Additionally, a hike in benchmark interest rate would affect growth stocks as these companies generally depend on easy access to cheap credit for their business expansion.
However, of the 11 broad sectors of the market’s benchmark S&P 500 Index, technology (up 4.1%) is the second-best performer month to date only after financials (up 5.3%). The teach-heavy Nasdaq Composite has rallied 4% so far this month compared with growth of 3% in the S&P 500 and 1.3% in the Dow.
Technology Sector Rallies in August
One reason why the growth-oriented technology sector has stood out this month is that the possible bond-buy tapering decision of the Fed is already factored in the tech sector’s valuation.
Fed Chair has refrained from giving any clue as to when tapering will start or the initial amount by which the quantitative easing program will be reduced. Consequently, the yield on the 10-year U.S. Treasury Note is hovering at less than 1.3%, which is well below its recent high of 1.778% recorded on Mar 31.
Second, Powell has clearly said that the economy has to improve a lot, especially related to the labor market, to achieve the Fed’s target of substantial progress. The central bank will think about raising the benchmark interest rate only after the economy achieves that target.
Not all technology stocks will succumb to a higher interest rate. Even if the Fed changes its dovish monetary stance in the near future, pushing up the market's interest rate, technology bigwigs (market capital > $100 billion) are unlikely to bear the brunt of a rising interest rate.
These companies have a robust business model across the world and command globally acclaimed brand values. Their strong financial position will help them to cope with a higher interest rate.
Technology is the Best Bet in the Long Term
The logic that the technology sector will underperform other cyclical sectors may be true for a short period of time but in the long term, technology stocks will remain the best bets. We must not forget that the growing demand for hi-tech superior products has been a catalyst for the sector in an otherwise tough environment.
A series of breakthroughs in the 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, has given a boost to the overall space.
Leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared with the developed world. The outbreak of coronavirus quickly changed the lifestyle and lookout of people over there.
They are now turning to digital platforms for office work (work from home), food ordering and other daily needs, including transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.
Our Top Picks
We have narrowed down our search to five U.S. technology bigwigs (market capital > $100 billion) with strong growth potential for 2021. These stocks witnessed solid earnings estimate revisions in the last 30 days and provided higher returns than the S&P 500 Index in the past three months. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Apple Inc.'s AAPL Services and Wearables businesses are expected to drive top-line growth in fiscal 2021 and beyond. Although Apple’s business primarily runs around its flagship iPhone, the Services portfolio has emerged as the company’s new cash cow. Its focus on autonomous vehicles and augmented reality/virtual reality technologies presents growth opportunities in the long haul.
The company has an expected earnings growth rate of 2.1% for next year (ending September 2022) after estimated 70.4% growth in the current year (ending September 2021). The Zacks Consensus Estimate for earnings next year improved 0.7% over the last 30 days. The stock price has climbed 23.2% in the past three months.
Microsoft Corp. MSFT is introducing new and improved Surface devices that could encourage enterprises to stick with Windows as they move toward BYOD and cloud computing. Microsoft’s advantages in this respect are two-fold.
First, the company has a very large installed base of Office users. Most legacy data are based on Office, so enterprises are usually reluctant to use other productivity solutions. Second, the BYOD model is dependent on security and cloud integration, both of which are Microsoft’s strengths.
The company has an expected earnings growth rate of 8% for the current year (ending June 2022). The Zacks Consensus Estimate for current-year earnings improved 0.2% over the last 30 days. The stock price has surged 22.7% in the past three months.
NVIDIA Corp. NVDA is benefiting from the coronavirus-induced work-from-home and learn-at-home wave. It is also benefiting from strong growth in GeForce desktop and notebook GPUs, which are boosting gaming revenues.
Moreover, a surge in Hyperscale demand remains a tailwind for the company’s Data Center business. Expansion of NVIDIA GeForce NOW is expected to drive its user base. Further, a solid uptake of artificial intelligence-based smart cockpit infotainment solutions is a boon.
The company has an expected earnings growth rate of 68% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 5.8% over the last 30 days. The stock price has soared 39.5% in the past three months.
Advanced Micro Devices Inc. AMD is riding on robust performance from the Computing and Graphics, and Enterprise Embedded and Semi-Custom segments. It is benefiting from strong sales of its Ryzen and EPYC server processors, owing to the increasing proliferation of AI and Machine Learning in industries like cloud gaming and the supercomputing domain.
Moreover, the growing clout of 7-nanometer products in the data center vertical, driven by work-from-home and online learning trends, is a key catalyst. Management raised its 2021 guidance for revenues and gross margin on the back of strong growth across all businesses.
The company has an expected earnings growth rate of 93.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.2% over the last 30 days. The stock price has jumped 37.8% in the past three months.
Qualcomm Inc. QCOM is well-positioned to benefit from a solid 5G traction with greater visibility to meet its long-term revenue targets. For calendar-year 2021, 5G handsets are expected to witness 150% year-over-year growth at the midpoint to about 450-550 units.
Qualcomm has raised the bar for driverless cars with the launch of the first-of-its-kind automotive platform — Snapdragon Ride — which enables automakers to transform their vehicles into self-driving cars using AI.
The company has an expected earnings growth rate of 10.6% for next year (ending September 2022). The Zacks Consensus Estimate for earnings next year improved 2.7% over the last 30 days. The stock price has advanced 9% in the past three months.
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