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- Usually, a bounce-back of a minimum of 20% happens in technology stocks following a correction, analysts note
- Now is a good time to renew mega-cap tech investments with newer themes – UBS
- The Zurich-based bank encourages investors to diversify within the technology sector.
Technology stocks have been among the best performers this year. Still, some analysts believe that investors should be more picky with tech stocks going forward.
Diversification advised
Mark Haefele, CIO of UBS Global Wealth Management, believes that stocks that represent the ‘more normal’ theme will perform better than tech giants.
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The investment banking company said that recent price volatility seen in the tech sector has indicated concentration risks and also signalized that uncertainty regarding the technology antitrust will persist until the US presidential election.
“We think global equity gains from here may lean more heavily on ‘more normal’ themes rather than the ‘stay at home’ dynamics that have favored mega-cap tech,” UBS said.
The Zurich-based bank encouraged investors to diversify within the technology sector.
“Tech stocks are not in a bubble, in our view, and are fairly valued given their earnings growth outlook,” UBS said.
The firm still likes “many of the largest names” but also pointed out that now is a good time to renew mega-cap tech investments with newer themes.
“We like 5G enablers and platform beneficiaries, which include leaders in smart mobility, cloud, and gaming, as well as China’s digital economy stocks, including ecommerce, food delivery, travel, search and fintech services,” UBS said.
The bank forecasted that the next rally will likely be predicated on progressive mobility gains, optimistic Covid-19 vaccine developments as well as developments in United States political dynamics. British stocks, US mid-cap stocks, rising market value stocks and worldwide industrial stocks are all likely to benefit from this trend, the bank said.
“Rebalancing mega-cap tech exposure does not mean selling it all off,” UBS added.
The wealth manager pointed out that usually, a bounce-back of a minimum of 20% happens in technology stocks following a correction.
Therefore, investors shouldn’t worry about short-term volatility or consider it a massive threat. Instead, the bank advised investors to use this volatility to “build up positions using options, structured investments, or a disciplined phasing-in strategy where appropriate”.
4 tech stocks to buy in Q4
Here are four tech stocks that are likely to yield positive returns in the fourth quarter.
Alphabet
Google’s parent company Alphabet (NASDAQ: GOOGL) reported the first negative revenue growth in its history earlier this year. However, analysts are adamant that Alphabet is likely to return impressive gains on the back of its diversified portfolio.
BofA’s strategist Anthony Cassamassino picked GOOGL as a “high conviction” idea for the fourth quarter.
Similarly, equity analyst Justin Post has a “Buy” rating and $1,850 price target for GOOGL stock.
“We believe that search advertising could be recovering faster than expected, while new business initiatives in subscription content, Cloud and self-driving vehicles are long-term COVID beneficiaries,” he wrote in a note to clients.
Nvidia
Nvidia (NASDAQ: NVDA) has grown into a proper tech behemoth. Nearly all prominent tech companies use Nvidia’s products to power its units and artificial intelligence processes. Therefore, it doesn’t come as a surprise that NVIDIA’s data center revenue erupted 167% year-over-year in the most recent quarter.
Nvidia’s impressive portfolio has grown further this year after the tech giant agreed to purchase the UK-based chipmaker Arm from SoftBank Group (T: 9984) for $40 billion.
Given the company’s recent performance and forward-looking outlook, both Oppenheimer and BMO raised their price target on NVDA to $600 and $650, respectively.
Target
Target (NYSE: TGT) stock price has rallied impressively this year helped by stronger consumer spending. A few days ago, Deutsche Bank’s analyst Paul Trussell maintained a “Buy” rating and $177 price target on the stock.
“Target is one of the retailers we are most bullish on into the Holiday period as it should be a prime destination for gift giving, toys, and seasonal décor (Halloween costumes and Christmas decorations) and should continue to showcase market share gains,” the analyst wrote in a note to clients.
The company’s shares are trading over 25% this year despite the pandemic. According to Trussell the shopping season is likely to help the stock to climb even further.
“We believe the company has a strategy that will resonate with consumers including Black Friday pricing throughout all of November (stores will be closed on Thanksgiving), Target Deal Days October 13-October 14, and extended price match guarantee”.
Twilio
Twilio’s (NYSE: TWLO) guidance is that the company will record a 30%+ revenue growth over the next four years. Yesterday, Twilio announced it will acquire data startup Segment in a $3.2 billion deal.
“A 4-year, 30%+ growth outlook cements TWLO as a member of our high growth comp group for nearly another half decade minimally,” wrote RBC Capital’s analyst Alex Zukin.
According to Zukin, there are three key underlying factors supporting TWLO’s growth outlook: 1) an expansive market opportunity, 2) an accelerating core messaging business, and 3) a nascent enterprise sales motion.
He reiterated his ‘Buy’ on TWLO and increased the price target from $320 per share to $375.
Summary
UBS Global Wealth Management believes the gains in technology stocks will likely abandon the mega-cap tech stocks and move to ‘more normal’ themes. Analysts note that a bounce-back of a minimum of 20% happens in technology stocks following a correction.
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