Tech stocks have had a rough year, but now may be the time to buy for investors looking to position themselves for future growth, according to Citi. The firm recently upgraded the information technology sector to overweight from a long-standing under weight rating. Software and services and technology hardware were raised to an overweight rating while semi-conductors were raised to market rate. “The high-level perspective is that the Tech sector (and Growth side of the S & P 500) have borne the brunt of multiple compression related to the sharp move higher in both nominal and real interest rates earlier in the year,” wrote strategist Scott Chronert in a Friday note. “In turn, we expected that any perceived peaking in Fed rate expectations would trigger valuation relief on the sector.” He added that S & P 500 growth stocks have outpaced value ones since the June lows. In addition, any rally in the S & P 500 will have to include tech, according to Chronert. “We remind that the Tech sector, at nearly 27% of the S & P 500 is critical to any index moving higher,” he wrote. “Similarly, the Software & Services Industry Group, with a 13% weight, is the single largest component of the index.” Of course, tech heavyweights are also important. The sector is largely influenced by Apple and Microsoft, which make up a 45% weight. Tech strategies and top picks There are some key strategies that Citi likes the most in the tech sector. The group’s lead model indicator remains constructive in the tech hardware sector. And, analysts see strength in earnings, sales and cash flow. In semiconductors, a positive fundamental turn may still be several months off, according to the note. “But, our proprietary valuation model gives us motivation to be early in turning incrementally more constructive,” wrote Chronert. Citi’s top picks in back-office software are buy-rated names Intuit and Workiva. “The expansion of the INTU portfolio creates a compelling multi-directional cross-sell story (Credit Karma↔TurboTax, QuickBooks↔Mailchimp) as INTU becomes increasingly mission critical,” wrote analyst Steve Enders. He added that macro bear fears are already priced in for the company. Intuit shares are down 36% year to date, and more than 42% off the stock’s 52-week high. For Workiva, Citi sees a stable core reporting business lending support for the company with a strong footprint in large enterprises, with upside in investments in emerging opportunities in ESG. In IT hardware, Citi’s top pick is Jabil, a company that’s had solid sales and earnings in recent quarters, a trend that’s likely to continue. “Investors do not fully understand Jabil’s strength and position in the automotive sector, which is now just shy of 10% of total sales; but given the increase in EV car designs and sales we see this as a material growth item,” wrote analyst Jim Suva. “We also note the return of healthcare equipment spending post COVID is a positive.” Workiva shares are down 38% since January, while Jabil shares have dropped 12% over the same period. The firm is also bullish on shares of Netflix, which it sees as the top pick in streaming. Currently, the stock is trading at a compelling entry point, according to the note. “Our bullish stance on Netflix is based in large part by the material benefits we expect to see from the firm’s introduction of an ad tier,” wrote Jason Bazinet. “We also see an opportunity for the firm to generate incremental cash flow by raising prices to capture additional consumer surplus.” As of Thursday’s close, Netflix shares are down more than 65% from its 52-week high. The note also names Elastic, Atlassian and KLA as its best buys in software and semiconductors.
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