Tech Slide Makes These 5 Value Stocks Must-Buys

Tech stocks suffered for the second consecutive day on Monday, taking down the broader markets with them. The Nasdaq and the Nasdaq 100 declined by 0.52% and 0.59%, respectively, experiencing their largest 2-day losses since Dec 2016. Japan’s Mizuho Securities downgraded Apple, Inc. (NASDAQ:AAPL) on Sunday, leading a second successive day of losses for tech stocks.

A report by The Goldman Sachs Group, Inc. (NYSE:GS) is believed to have set off the slide on Friday. The debate has now veered around to the validity of concerns raised by this report. While market watchers are divided on the issue, they are in agreement on the fact that this is only a near term correction. This is why it’s a good time to pick up value stocks from the sector given that gains are likely to resume after a short respite.

Are Valuation Concerns Overblown?

Goldman’s report, titled “Is FANG Mispriced?” is believed to have set off the initial round of losses. While the report is not overtly negative about the stocks in question, namely Facebook, Inc. (NASDAQ:FB) , Amazon.com, Inc. (NASDAQ:AMZN) , Apple, Microsoft Corp. (NASDAQ:MSFT) and Alphabet Inc. (NASDAQ:GOOGL) , it expresses concern about their valuations and low levels of volatility. Together, these stocks are responsible for around 40% of the S&P 500’s gains year to date, even though they make up only 13% of the index.

But what of the tech sector as a whole? A report released by Bank of America (NYSE:BAC) division Bank of America Merrill Lynch states that in terms of price-to-earnings ratio, the sector has reached its peak valuation since the financial crisis of 2008.

However, the investment banking division goes on to point out that the price-to-earnings ratio was still lower compared to historical levels, including those reached during the Tech Bubble which ended in 2000. Moreover, all the industries within the sector also have price to earnings ratios which are below or in line with their historical averages.

Correction, Not Meltdown, Underway

Most analysts do agree that recent losses are unlikely to continue for an extended period. Investment managers have stated that recent gains for tech stocks may have been excessive. This is why a near term correction is needed in order to reduce the level of expectations surrounding the sector. Also, there is little chance of the current trend of declines snowballing into something bigger.

This is because the factors which had driven tech stocks upward remain firmly in place. President Trump’s policies are unlikely to provide the economy with the support that was previously expected. In such an event, technology is likely to be the only tool companies have to boost productivity and performance. In any case, demand for the sector’s products and services remains high. Market watchers now believe that the tech sector should begin to post better performances starting July, when the second quarter earnings season is slated to begin.

Our Choices

Concerns about valuations notwithstanding, the factors which drove up tech stocks this year remain firmly in place. However, recent gains have been deemed excessive, which is what is leading to a near term correction. This represents a great opportunity to pick up stocks priced attractively relative to their intrinsic value.

Adding select value stocks from the tech sector to your portfolio makes good sense at this point. Our selection is also backed by a good Zacks Value Score and Zacks Rank.

We narrowed down our choices with the help of our new style score system.

Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.

YY Inc. (NASDAQ:YY) is a communication social platform in China, which engages users in online group activities through voice, text and video.

YY Inc. holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘A.’ The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 11.22, lower than the industry average of 20.91. It has a PEG ratio of 0.84, lower than the industry average of 1.10.The stock has returned 46.6% year to date, outperforming the Zacks Internet - Content Market sector, which has gained 30.7% over the same period.

Quantum Corporation (NYSE:QTM) is a leading expert in scale-out storage, archive and data protection, providing solutions for capturing, sharing and preserving digital assets over the entire data lifecycle.

Quantum Corp holds a Value Style Score of ‘B.’ It has a PEG ratio of 0.73, lower than the industry average of 0.79. The stock has returned 17% year to date, outperforming the Zacks Computer- Storage Devices Market sector, which has gained 15.3% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ON Semiconductor Corporation (NASDAQ:ON) is an original equipment manufacturer (OEM) of a broad range of discrete and embedded semiconductor components.

ON Semiconductor holds a Zacks Rank #2 (Buy) has a Value Style Score of ‘A.’ The stock has a P/E (F1) of 12.02x, lower than the industry average of 22.13. It has a PEG ratio of 0.72, lower than the industry average of 1.60.The stock has returned 23.3% year to date, outperforming the Zacks Semiconductor - Analog And Mixed Market sector, which has gained 15% over the same period.

MiX Telematics Limited (NYSE:MIXT) is a global provider of fleet and mobile asset management solutions using the software-as-a-service delivery model.

MiX Telematics holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ The stock has a P/E (F1) of 17.58x and a PEG ratio of 0.88, both of which are better than the industry average. The stock has returned 13.6% year to date, marginally underperforming the Zacks Internet - Software Market sector, which has gained 15.7% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential

Changyou.com Limited (NASDAQ:CYOU) is a developer and operator of online games in China.

Changyou.com holds a Zacks Rank #2 and has a Value Style Score of ‘A.’ The stock has a P/E (F1) of 12.06x, lower than the industry average of 20.91. It has a PEG ratio of 0.96, lower than the industry average of 1.10. The stock has returned 82.7% year to date, outperforming the Zacks Diversified Communication Services Market sector, which has gained 30.6% over the same period.

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