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5 Tech Stocks Set to Outperform According To Quantamize's AI Model Portfolio

Chris Dier-Scalise

After undergoing a baptism by fire in the waning months of 2018, the technology sector has lost some of its luster in 2019.

Although the Technology Select Sector SPDR Fund (NYSE: XLK) is up 12 percent year-to-date (outperforming the S&P 500 by two percentage points), it’s no longer the leading sector, lagging behind the Industrial Select Sector SPDR Fund (NYSE: XLI) — up almost 17 percent YTD — and the Energy Select Sector SPDR (NYSE: XLE) — up over 20 percent in that span.

This is a pretty stark contrast from the last decade, as technology has been the best performing sector post-financial crisis. Of course, the higher they rise, the harder they fall. Precipitous drops in Microsoft Corporation (NASDAQ: MSFT) and Apple Inc (NASDAQ: AAPL), two of XLK’s top holdings, erased more than $1 trillion in collective market value last quarter.

Despite no longer being the darling of the market (at least, for now), there are still names within the sector that can be found to deliver alpha for investors seeking outperformance. Take a quick look at a comparison between the XLK and the backtested performance of the Quantamize U.S. Technology Q-Folio, generated by stock research platform Quantamize’s AI model.

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As of January 31, the U.S. Tech Q-Folio, the top holdings of which include Verizon Communications Inc. (NYSE: VZ) and CDK Global Inc. (NASDAQ: CDK), was outperforming the XLK by about 5.5 percent. However, prior to Q4 2018, the Q-Folio was up on the S&P tech ETF by more than 14 percent.

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Like the platform’s other model portfolios, Quantamize’s U.S. Technology Q-Folio is a concentrated quantitative portfolio whose components are compiled through artificial intelligence and multi-factor modeling to provide investors fresh, novel ideas for how to approach building a portfolio around a particular investment theme. We can see a full breakdown of the current holdings and their proportions below.

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The five holdings in the model portfolio, consisting of companies from IT, communications and media industries, represent a diverse basket of U.S. technology stocks with the most appealing quantitative and qualitative traits as determined by Quantamize’s AI-driven multi-factor modeling. Each stock, excluding Verizon, is rated as a top U.S. technology buy according to the Quantamize Q-factor scoring model, and is weighted to maximize the portfolio’s return and minimize its volatility.

In a breakdown of the Q-Folio’s characteristics, we can also get a sense of how the holdings compare to the XLK.

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According to fund data provided by its issuer, XLK and the U.S. Tech Q-Folio have comparable price-to-book and RoE characteristics. However, the Q-Folio represents a better value based on forward p/e ratio, which values stocks based on their predicted future earnings, with the Q-Folio at 13.81 compared to XLK’s 18.20 ratio.

Keep in mind that the U.S. tech Q-Folio is rebuilt and rebalanced on a monthly basis according to Quantamize’s multi-factor model, while the State Street SPDR ETFs are rebalanced quarterly. The model itself has a back-tested return performance of 1.99 percent over the first month of 2019, although its 3-year returns are currently calculated at 51 percent.

This relative outperformance reinforces that tech remains a stock picker’s market. The days of the FANG stocks single-handedly driving the market higher may be over, but alpha can be found for investors with the right tools at their disposal.

Quantamize is a content partner of Benzinga

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