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5 Tech Stocks to Buck the Sector's Downtrend

Technology stocks may no longer be the preferred option for U.S. investors. Over the last month, the Technology Sector SPDR (XLK) has become the highest decliner among the S&P 500 sectors, losing 5.2%. Additionally, the sector is down 1.5% year to date. Poor earnings results have been the nemesis for S&P 500’s largest sector this year.

But that doesn’t mean that stocks which make up nearly a fifth of the benchmark can be ignored outright. Most of the disappointment has stemmed from the earnings of behemoths whose impact overshadowed several smaller and better performers. This is why it makes sense to pick such tech stocks from the sector that have silently defied the trend.

How the Sector Paid for Dismal Earnings

Tech majors posted particularly dismal earnings for the first quarter, dragging the broader sector lower. Both earnings and revenues of International Business Machines Corporation IBM registered a year-over-year decline. Further, Microsoft Corporation MSFT reported lower-than-expected earnings results. Alphabet Inc. GOOGL and Netflix, Inc. NFLX have also posted dismal quarterly numbers.

However, the biggest disappointment for the sector was Apple Inc.’s AAPL earnings numbers. But the big worry for investors was the decline in iPhone sales. Last week, the iPhone maker hit its worst closing level since Jun 2014, following concerns over a slump in iPhone sales.

As of May 13, nearly 81% of technology companies within the S&P 500 had reported earnings results. Total earnings of these companies are down 5.6% from the same period last year due to a mere 0.8% rise in revenues.

Size Does Matter

Excluding Apple, the sector’s Q1 earnings growth would be 0.8%. This makes it imperative to confront two challenges facing the sector. First, a few large companies have an outsized impact on the sector as a whole. Notable exceptions defying this trend are Facebook, Inc. FB and Amazon.com, Inc. AMZN which posted stellar results.

Secondly, several investors have been rotating their funds away from the sector and into others like energy and utilities which were the top flavors of the season. Despite the dismal sentiment surrounding the sector, not all tech companies have delivered poor performances. But size may have become a handicap for many sector bellwethers, since they hinder innovation which is key to the sector’s performance and in turn the ability to deliver growth. Selecting smaller companies may be the key to choosing better stocks from the sector.

Our Choices

Despite poor earnings performance for the sector as a whole, several tech stocks have delivered strong results. If you’re still keen on this sector, they can make good additions to your portfolio.

When looking for such picks, it is important to consider previous EPS surprises. Even then, picking winning stocks may be a difficult task.  

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Qorvo, Inc. QRVO is a leading provider of core technologies and radio frequency (RF) solutions for mobile, infrastructure and aerospace/defense applications.

Qorvo has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 15.2% for the current year. Its earnings estimate for the current year has improved by 4.1% over the last 30 days. Earnings surprise for the last quarter was 23.2%.

Amkor Technology, Inc. AMKR is an independent provider of semiconductor packaging and test services.

Amkor Technology has a Zacks Rank #1 and a VGM Score of A. Its earnings estimate for the current year has improved by 40% over the last 30 days. Earnings surprise for the last quarter was 100%.

Netgear Inc. NTGR specializes in networking products that address the specific needs of small business and home users.

Netgear has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 26.8% for the current year. Its earnings estimate for the current year has improved by 2.6% over the last 30 days. Earnings surprise for the last quarter was 25%.

Nuance Communications, Inc. NUAN is a provider of speech and imaging solutions for businesses and consumers around the world.

Nuance Communications has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of 32.4% for the current year. It has a P/E (F1) of 16.48, which is lower than the industry average of 19.29. Its earnings estimate for the current year has improved by 6.4% over the last 30 days. Earnings surprise for the last quarter was 19.1%.

Arista Networks, Inc. ANET is engaged in providing cloud networking solutions for datacenter and cloud computing environments.

Arista Networks has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of 18.5% for the current year. Its earnings estimate for the current year has improved by 7.2% over the last 30 days. Earnings surprise for the last quarter was 12.2%.

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NETGEAR INC (NTGR): Free Stock Analysis Report
 
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