U.S. Markets open in 2 hrs 12 mins

Tech stock bargain hunters grab Apple, Google

Aaron Pressman

With markets careening over the past few days, the technology sector has been among the most volatile. The sector had the second-largest drop over the past month, down 11% as a group, lagging only energy stocks. But on Tuesday at midday, tech stocks were up 3%, the top snapback performance of any sector.

With some stocks 20% or more off recent highs, investors have been going bargain hunting among the fallen. Some analysts say it's still too early -- they think the market could be easily spooked again on more bad news out of China -- and suggest taking a disciplined approach.

The recent declines have left prices on some big names in the "blue-plate special" category, says Kristina Hooper, U.S. investment strategist at money manager Allianz Global Investors. "We probably haven't seen the end of this -- we're probably going to see more of a sell-off and certainly more volatility," she said. "But this is an opportunity to buy what had been some high-priced names."

The debate over buying beaten-down tech stocks starts at the top with the two largest companies: Apple (AAPL) and Google (GOOGL).

At the opening on Monday, Apple was trading for more than $40 less than its recent peak of almost $133, which it hit a month ago. Trading at around $109 at midday Tuesday after a partial recovery, the iPhone maker is valued at just 11 times earnings, well below the S&P 500 Index average of almost 16. And that's actual GAAP profits at Apple, not the funny adjusted numbers that most tech companies issue. Apple's price-to-earnings growth ratio, or PEG, is at 0.7 -- it's typically above 1.0.

The problem is China. A majority of Apple's revenue growth of late has come from sales in China and that's obviously the focus of all of the economic worries.









But the attraction to Apple isn't likely to fade much even as growth in China slows. Consumers continued snapping up iPhones and Mac computers even during past recessions in other parts of the world, a clear sign that spending on mobile phones is top priority.

CEO Tim Cook surprised the market on Monday by releasing details about the strength of Apple in China.  "We have continued to experience strong growth for our business in China through July and August," Cook wrote. "Growth in iPhone activations has actually accelerated over the past few weeks."

[Get the Latest Market Data and News with the Yahoo Finance App]

That seems to be bolstering the case for bargain hunters, as Apple shares climbed 6% Tuesday.

Then there's Google. Recent pronouncements from new CFO Ruth Porat about keeping a tighter lid on expenses along with the company's plan to reorganize under the Alphabet name had sent Google shares on a strong rally. But the recent turmoil cut down the shares, from over $713 to $640 on Tuesday.

The funny thing is, Google doesn't do business in China. It wouldn't agree to government censorship so the world's largest search engine is banned in that country. And almost all Chinese phones running Android contain a modified version that doesn't include any actual Google apps or services.

The real issue for Google among investors is the mobile conundrum. As people use their phones more, they spend more time in apps and less time using plain old search -- still Google's most important core profit machine. But Google has a host of mobile-oriented initiatives, including selling ads for thousands of apps via its AdMob unit, collecting information about consumers via its Android operating system and serving up lucrative video ads in its own YouTube app.

"We would view this broad market pressure as an opportunity to add to positions," Mizuho Securities analyst Neil Doshi wrote on Tuesday. "The upcoming Alphabet org-structure should be a catalyst for the stock." Mizuho also saw opportunities in Facebook (FB) and Amazon (AMZN).

Opportunities in pressured companies

Aside from the big stocks, some analysts are also looking at special situations in the tech sector for possible bargains. These are companies that are under pressure to reorganize or make changes to appease activist investors.

Mobile phone chip maker Qualcomm (QCOM) was down 14% this month through Monday. Even with a 3% gain on Tuesday, it's just off its fresh 52-week low set. The dividend yield is up to 3.5%, which is high for a tech stock.

The company has rejected calls to separate its chip business from a unit that collects royalties for licensing patents and other intellectual property. They've also already suffered big hits in China, where the government has pressured the company to lower its royalty rate. Lately, the stock was buffeted by rumors of losing some iPhone chip business to Intel.

So the question for bargain hunters is whether Qualcomm's stock has overreacted to the bad news or is just pausing until the next crisis hits the share price.

At software maker VMWare (VMW), hedge fund Elliot Management is pushing for a spinoff of the majority stake owned by EMC (EMC). A standstill agreement the fund struck in January with the company is expiring soon, which could up the pressure. EMC a few weeks ago seemingly floated out the opposite scenario -- that it would just suck up the publicly traded minority stake in VMWare it doesn't already own. Making the situation even messier is that EMC itself is the subject of much buyout speculation, too.

Most advisers warn that there could be a lot more volatility in the markets in coming weeks. Many of the tech stocks that have fallen the most, like Netflix (NFLX), Tesla (TSLA) and cybersecurity darling FireEye (FEYE), remain incredibly expensive despite recent dips.



























After recovering 9% at midday on Tuesday, Netflix is trading at more than 360 times what analysts think it will make in adjusted earnings over the next year. Tesla, up 4% on Tuesday, carries a forward P/E ratio of over 180. And FireEye, up 8%, has no profits in sight despite a $6 billion market cap and slowing sales growth.

Kim Caughey, senior equity analyst and portfolio manager at Fort Pitt Capital Group, told Yahoo Finance that her firm is staying away from former high flyers like Netflx, despite the bounce back on Tuesday. "It’s flashing a big caution to us," she said.