Big Tech Faces Anti-Trust Scare: 5 Smaller Choices

On the afternoon of Jul 23, the U.S. government finally revealed that it was looking into the alleged anticompetitive practices of the country’s largest tech companies. Earlier in the day, senior officials of the FAANG companies, but for Netflix (NASDAQ:NFLX) , fielded probing questions during separate Congressional hearings.

Shares of tech majors still remained unscathed at the end of the day’s trading. But the tide turned post Tuesday afternoon’s revelations from the antitrust investigation. As a result, shares of major tech firms declined in after-market trade with Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) emerging relatively unscathed.

The investigation against these tech giants is likely politically motivated. However, investors would be prudent to stay away from these market favorites for the time being. Then again, tech continues to be an evergreen investment theme, which is why it would make greater sense to invest in smaller companies from the sector.

Department of Justice Unveils Concerns

On Tuesday afternoon, a Wall Street Journal report surfaced claiming that a major investigation on the conduct of major tech companies was underway at the Department of Justice (DoJ). Only minutes later, the department confirmed the investigation, stating that its antitrust division was examining if and how “market-leading online platforms have achieved market power.”

According to the DoJ, its major concern was that if such charges were true, these practices may have “reduced competition, stifled innovation, or otherwise harmed consumers.” The DoJ added that if infringement of competitive laws had indeed occurred, “the Department will proceed appropriately to seek redress.”

Following the hearings on Capitol Hill, shares of big tech players had closed the day relatively unscathed. Shares of Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) ended the day’s trading flat while Alphabet (NASDAQ:GOOGL) notched up marginal gains. Only shares of Amazon (NASDAQ:AMZN) declined, losing 0.5%.

But the tide turned after the antitrust investigation revelations. Shares of Amazon, Alphabet and Facebook lost more than 1% in after-market trading. Additionally, Apple and Microsoft, the biggest tech firm in terms of market value lost less than 1% during this period.

Investigation Unlikely to End Quickly

Big Tech investors were concerned after the investigation revelations while smaller competitors, including companies like Yelp (NYSE:YELP) , sounded jubilant. Former members of the Justice Department revealed that the DoJ had been scrutinizing Big Tech for at least a decade. And some analysts think these companies will emerge largely unscathed.

Other experts believe the investigation is politically motivated since the antitrust law hasn’t changed in two decades. But investors should be concerned ahead of crucial earnings results over this week and the next. This is because Big Tech is a favorite adversary in the run-up to next year’s Presidential elections.

Our Choices

The current antitrust investigation is possibly politically motivated ahead of next year’s crucial elections. However, it does place a cloud on the prospects of major tech firms, since such investigations are unlikely to be completed in a hurry. In such an event it would make sense to seek smaller alternatives from a sector which retain immense potential. However, picking winning stocks may prove to be difficult.

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.

Progress Software Corporation (NASDAQ:PRGS) is a developer of business applications with global operations.

Progress Software has a VGM Score of B. The company’s expected earnings growth for the current year is 2%.The Zacks Consensus Estimate for the current year has improved by 3.4% over the past 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CACI International (NYSE:CACI) delivers IT applications and infrastructure to improve communications and secure the integrity of information systems and networks, enhance data collection and analysis, and increase efficiency and mission effectiveness.

CACI International has a Zacks Rank #2 (Buy) and VGM Score of A. The company’s expected earnings growth for the current year is 13.3%.The Zacks Consensus Estimate for the current year has improved by 1.5% over the past 30 days.

Woodward, Inc. (NASDAQ:WWD) is an independent designer, manufacturer and service provider of energy control and optimization solutions.

Woodward has a Zacks Rank #2 and VGM Score of A. The company’s expected earnings growth for the current year is 24%.The Zacks Consensus Estimate for the current year has improved by 2.3% over the past 30 days.

Ciena Corporation (NYSE:CIEN) is a leading provider of optical networking equipment, software and services.

Ciena Corp has a Zacks Rank #2 and VGM Score of A. The company’s expected earnings growth for the current year is 44.1%.The Zacks Consensus Estimate for the current year has improved by 0.8% over the past 30 days.

eGain Corporation (NASDAQ:EGAN) provides customer engagement solutions.

eGain has a Zacks Rank #2 and VGM Score of B. The company’s expected earnings growth for the current year is 4.6%.

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