Why Tesla Stock, Apple and 11 others are buying even as tech stocks come under fire

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Apple and other tech stocks had a rocky start to 2022. They could still be good picks.

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Tech stocks are under fire again, for familiar reasons. Investors can blame worries about rising inflation, expectations of tighter monetary policy from the Federal Reserve and, more recently, a sharp spike in bond yields.

Nasdaq-100
futures, which track the largest constituents in the tech sector


Nasdaq Compound

index, indicated a fall of 1.6% at the open on Tuesday. Familiar names like


Apple

(symbol: AAPL),


Microsoft

(MSFT), and


You’re here

(TSLA) were all down in premarket trading, down 1.8%, 1.9% and 2%, respectively.

Against a backdrop of historic inflation – the US consumer price index rose in December at the fastest annual rate since 1982 – investors are worried about how quickly the Fed will raise interest rates. Markets had forecast three rate hikes in 2022, with the first in March, but there are growing rumors that bigger or bigger increases could be on the horizon.

Billionaire hedge fund investor Bill Ackman has called for a “shock and awe” approach the central bank, with a larger than expected increase of 50 basis points in March. JPMorgan Chase (JPM) boss Jamie Dimon predicts six or seven rate hikes coming this year.

All of this is fueling a major spike in bond yields. The yield on the benchmark 10-year US Treasury note is at its highest level since January 2020, touching 1.84% on Tuesday before stabilizing closer to 1.82%. It ended last week at 1.79% and started the year at 1.53%.

None of this is good for stocks, especially tech stocks. The valuations of many high-growth tech companies are betting on earnings in the years to come, and high yields tend to discount the present value of future cash. The steady rise in the 10-year yield since the start of the month corresponds to a decline for technology – the Nasdaq-100 is down almost 6% over the same period.

“Clearly, 2022 has been a brutal year for tech investors as the Fed tightening backdrop and rising rates have catalyzed a sell-off for the tech sector and are a worrying sign for the start of the year,” Dan Ives, an analyst at brokerage and investment bank Wedbush, said in a note Tuesday. “Many tech stocks are down more than 15%, with high multiple names down 35% to 40% to start the year.”

Yet Ives, who is among the more optimistic tech bulls, remains the same.

“The key debate on the street is whether high-tech stocks can rise further amid a more hawkish Fed,” he said. “The answer is yes.”

Ives stressed last week that he believes the next earnings season will be crucial for the sector, with Wall Street needing to see a bullish outlook for 2022 to get back behind technology. He dubbed that message on Tuesday.

“We view this as the most important upcoming earnings season for tech stocks in many years to reverse the trend and derail negative sentiment,” Ives said.

Wedbush expects very high growth rates, which could be revealed in financial results, will help justify technology valuations, with some $1 trillion in planned corporate spending on cloud software, adding a another nudge.

“The underlying growth in the tech space is being underestimated by the street and so will neutralize some of these perceived headwinds from the Fed,” the analyst said.

Wedbush’s favorite large-cap tech stocks are


Apple

and


Microsoft
,

with Tesla as well as


Li Cycle

(LICY) being the preferred names for electric vehicles.

In cybersecurity, Ives likes


Z-scale

(ZS) and


CyberArk Software

(CYBR), as well as


Palo Alto Networks

(PANW) and


Defensible

(TENB) – both of which were added to Wedbush’s “Best Ideas List” on Tuesday.

As for “value” names – which Ives says could be a safety blanket amid the Fed storm – Wedbush points out


Pegasystems

(PEGA),


Check Point Software Technologies

(CHKP),


Consensus cloud solutions

(CCSI),


cool systems

(Kind and


Ziff Davis

(ZD).

Write to Jack Denton at [email protected]

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