- Jill Carey Hall at Bank of America says risks for smaller tech stocks is fading after a steep drop.
- Carey Hall and a group of analysts named their top picks in the sector and discussed their outlooks.
- Her firm is less bullish on tech overall, noting that investor exposure remains high.
“When is it time to buy tech? When you stop asking,” writes Savita Subramanian, Bank of America’s head of US equity strategy and quantitative strategy, in a recent note to clients.
In the June 3 note, Subramanian points out that after the dot-com bubble burst in early 2000 it took several years for tech stocks to finally reach their low point. By then, she says, investors had lost interest in the sector.
While tech stocks are in the gutter right now, it doesn’t seem like investors are abandoning the sector just yet. Five months after tech stocks peaked, investors are still overweight tech and tech-adjacent themes, and growth stocks are still expensive, she says.
But when it comes to individual stocks, especially among smaller companies, Equity Strategist and Head of US Small/Mid Cap Strategy Jill Carey Hall has a more nuanced take. She thinks the US is in the late stage of a market cycle, and while that’s a complex environment for tech stocks, there are still opportunities to be found even after the sell-off of the last few months.
“Positioning risk is limited, and we are seeing some momentum in flows and in BofA upgrades relative to downgrades,” she wrote in a recent note.
In that note, Carey Hall and a team of BofA analysts break the tech sector down by industry. The analysts wrote that investors picking stocks in the business software industry should look for “enterprise software names that are larger cap with a GARP profile,” as money-losing companies have fallen out of favor and Wall Street prefers bigger names that are delivering free cash flow growth.
Among chipmakers, the firm says the current cycle might be peaking and a low point in overall sales could be three or four quarters away, which makes the space riskier. Networking and cybersecurity companies are now expecting supply chain problems to last into 2023, but BofA analysts think conditions will improve after that.
“We believe our Buy-rated cybersecurity stocks are well-positioned to benefit from the growing efforts to protect the networks at both the enterprise and consumer levels, fueling the adoption of new security paradigm,” wrote analysts Tal Liani, Jonathan Eisenson, Madeline Brooks, and Tomer Zilberman.
BofA makes a split call on internet stocks, saying that if the US can avoid a, companies that gain market share like Amazon, Airbnb, DoorDash, and Snap should outperform, while companies like Alphabet, Match, and Meta Platforms are good picks in a recession because they could cut spending and maintain their profit growth.
Hardware stocks, meanwhile, have done the worst relative to other sectors during the late cycle period and in economic downturns.
With those ideas in mind, Carey Hall says a few companies stand out right now.
“We highlight 8 SMID ideas with 45% avg. implied upside potential to POs, from turnaround stocks with exposure to growth themes (ON) to stocks executing in a challenging supply chain backdrop (JBL) to mkt. share gainers (DASH),” Carey Hall wrote.
The eight stocks are ranked below based on how much upside is available relative to Bank of America’s price targets as of Friday’s closing prices.
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