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Profit From Tech Sector Turbulence With These 5 Value Picks

Ritujay Ghosh
Bank of Nova Scotia (BNS) has an impressive earnings surprise history and currently possesses the right combination of the two key ingredients for a likely beat in its next quarterly report.

Tech stocks have been feeling the heat for quite a while now with all major players taking a beating. The latest prediction by Morgan Stanley MS that iPhone sales will soften in the June quarter has further taken its toll on tech stocks. Last week, chipmaker Taiwan Semiconductor Manufacturing Company Ltd. TSM came up with a weak financial outlook, which also had a domino effect on the entire technology sector, especially on semiconductor stocks.

Moreover, fears of a trade war with China, which undoubtedly will affect the tech companies the most, saw tech stocks plummeting. Tech stocks have been suffering since the beginning of March with Facebook, Inc. FB leading the rout after it was accused of a data breach. Worries further escalated after President Donald Trump took to Twitter TWTR to bash Amazon AMZN about its business policies.

However, tech stocks literally drove the markets in 2017 and also this year till February. Also, there’s high optimism around an exceptional earnings season from tech stocks. Moreover, the fundamentals which powered the ascent of tech stocks remain firmly in place. This is why it makes good sense to buy sector plays on the dip ahead of their next rebound.

Low iPhone Sales Prediction, TSM’s Weak Outlook Add to Worries

Tech stocks have been bleeding for quite some time now. Shares of all major tech companies have taken a hit over the last one-and-a-half month. And if this wasn’t enough Morgan Stanley last week predicted that iPhone sales will soften in the June quarter. This saw not only shares of Apple Inc. AAPL trending down but other tech giants suffering too. Apple’s shares have declines 7.4% in the last five days.

The week sales projection of iPhone follows a bleak financial outlook provided by Taiwan Semiconductor, the world’s largest contract chipmaker. The company stated that its second-quarter 2018 revenues are likely to fall in the range of $7.8-$7.9 billion, lagging the consensus estimate of $8.5 billion. Consequently, shares of Taiwan Semiconductor declined 5.6%.

The weak outlook took a toll on the entire tech sector, especially on the semiconductor stocks such as Micron Technology Inc. MU and Advanced Micro Devices Inc. AMD. Given that Taiwan Semiconductor is the largest chipset supplier to both Apple and NVIDIA Corp. (NVDA), shares of these too companies plummeted.

Facebook, Amazon, Trade Fears Hit Tech Stocks

Despite having a brilliant run in 2017 and early this year, tech stocks started feeling the heat since the beginning of March. The initial fears were sparked after Trump announced tariffs on a wide range of products imported from China. This spread panic among investors which further escalated once China imposed retaliatory tariffs, igniting fears of a trade war. The tech sector will be one of the worst victims if a trade war happens. This dented the confidence of investors with shares of most tech companies sliding.

Moreover, Facebook, which got embroiled in a data misuse scandal that affected the personal data of more than 80 million users, did its share of damage to the tech stocks. Facebook, which was one of the best performing tech stocks last year saw it market capitalization erase by $100 billion in just a week. Facebook’s data misuse scandal made the entire sector suffer on fears of a regulatory clampdown.

And to add to the woes followed Trump’s series of tweets bashing Amazon for its tax treatment. Trump has time and again lashed out at Amazon and its CEO Jeff Bezos saying that the United States Postal Service (USPS) is losing billions of dollars every year by charging the likes of Amazon and others a pittance to deliver their packages. This once again saw the company’s shares suffering a blow.

Our Choices

Given the bad phase for the tech stocks, investor concerns are only natural. However, this sector has been driving the markets this year and was one of the significant beneficiaries of a roaring rally last year.

Moreover, trade war fears too somewhat seem to have eased for the time being. Also, the earning season is off to a strong start and there is huge optimism around tech stocks putting up a stellar show this time around like the last many.

Given this scenario, it will not be too ambitious to expect a rebound in the near term. It does make sense now to buy value stocks from the technology space that could prove to be lucrative finds, going forward. Our selection is also backed by a good Value Score and a Zacks Rank #1 (Strong Buy) and 2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

We narrowed down our choices with the help of our new Style Score System.

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

Western Digital Corporation WDC addresses ever-changing market needs by providing a full portfolio of compelling, high-quality storage solutions with customer-focused innovation, high efficiency, flexibility and speed. 

Western Digital Corporation has a Zacks Rank #1 and Value Score of A. The forward price-to-earnings ratio (P/E) for the current financial year (F1) 7.02, lower than the industry average of 12.60.

Micro Focus International plc MFGP is an infrastructure software company which develops, sells and supports software products and solutions. 

Micro Focus International has a Zacks Rank #1 and Value Score of B. The forward price-to-earnings ratio (P/E) for the current financial year (F1) 8.62, lower than the industry average of 59.50.

inTest Corporation INTT is an independent designer, manufacturer and marketer of ATE interface solutions and temperature management products, which are used by semiconductor manufacturers to perform final testing of integrated circuits and wafers. 

inTest Corporation has a Zacks Rank #2 and Value Score of B. The forward price-to-earnings ratio (P/E) for the current financial year (F1) 8.94, lower than the industry average of 15.84.

Arrow Electronics, Inc. ARW is the world's largest distributor of electronic components and computer products to industrial and commercial customers. 

Arrow Electronics has a Zacks Rank #2 and Value Score of A. The forward price-to-earnings ratio (P/E) for the current financial year (F1) 9.18, lower than the industry average of 12.11.

SMART Global Holdings, Inc. SGH is a designer, manufacturer and supplier of electronic subsystems to OEMs. 

SMART Global Holdings has a Zacks Rank #2 and Value Score of A. The forward price-to-earnings ratio (P/E) for the current financial year (F1) 6.29, lower than the industry average of 16.91.

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Western Digital Corporation (WDC) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Facebook, Inc. (FB) : Free Stock Analysis Report
 
Twitter, Inc. (TWTR) : Free Stock Analysis Report
 
Apple Inc. (AAPL) : Free Stock Analysis Report
 
Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report
 
inTest Corporation (INTT) : Free Stock Analysis Report
 
Arrow Electronics, Inc. (ARW) : Free Stock Analysis Report
 
Morgan Stanley (MS) : Free Stock Analysis Report
 
Micron Technology, Inc. (MU) : Free Stock Analysis Report
 
Taiwan Semiconductor Manufacturing Company Ltd. (TSM) : Free Stock Analysis Report
 
SMART Global Holdings, Inc. (SGH) : Free Stock Analysis Report
 
Micro Focus International PLC Sponsored ADR (MFGP) : Free Stock Analysis Report
 
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