These are trying times we will remember for decades to come. And its important to acknowledge the human tragedy as the world deals with this crisis. Consequently, sentiment soured to extremes on Main Street as well as Wall Street.
Social distancing and quarantine measures have created a colossal problem for businesses all over the world.All gross domestic product (GDP) estimates until this point are now useless. The forecast went from growth to recession in the blink of an eye.Technology stocks have shown some relative resilience, but after alls said and done, no business will avoid suffering big losses this year.
Nevertheless, in todays write-up we share some upside potential in technology stocks. Rather than scraping the bottom of the proverbial barrel, its more constructive to concentrate on the top three competitors in their industries. When the recovery rally comes, these stocks will lead the way.
Although, I can confidently say that we are in a bottoming process, this is not the same as picking the bottom. This wont be a point in time but rather an effort to stabilize, and this starts by having less volatile days in the stock market. Clearly we are not there yet.
Swinging from +5% to 5% in mere minutes cannot be the end of this correction. Investors need the pendulum to slow down and volatility to abate. This return to stability will only come with increased information on the virus front.
Now that countries are accelerating Covid-19 testing, infection numbers are ballooning. Hopefully death rates will slow welcome news for a weary-eyed society. As it stands, the medical community is making great headway in developing a Covid-19 vaccine and therapeutics to treat the disease.
After all the medical reading the public has done lately, weve nearly earned a degree in virology!
With a light ahead in the tunnel, there are a few opportunities to consider in the market, such asMicrosoft (NASDAQ:MSFT), Salesforce(NYSE:CRM) and Alibaba (NYSE:BABA).
These have been the best technology stocks of the recent past and will continue to be in the future. Investing in them on giant dips makes sense right now, but I would still advise against giant size trades.
We still have too many unknowns in the market, so minimizing risk is paramount until more answers emerge. The market still has plenty of potential to be violent.
Source: Charts by TradingView
There will be good to come out of the coronavirus crisis. For decades the world has been striving to increase remote work. Now with many local governments issuing stay-at-home orders, the process will force a giant leap forward in that direction. Specifically, it will kick into high gear the migration to the cloud campaign and Salesforce is there. In its early days, it battled the behemoth Microsoft and beat it. Since then it has been setting growth records under the leadership of Marc Benioff. This is important to note because he is now back as sole CEO of CRM after a brief interruption last year. So the company is back in the hands of its best general.
This side benefits of accelerated cloud movement will directly benefit Salesforce.com for the longer term. Companies are scrambling to sign up with cloud services. While this may be a temporary necessity, it will create habits for many far past the threat of this contagion. Businesses will find ongoing uses for services like this and they will become part of daily mode of operation for ever. Meaning that out of necessity, corporations will finally be able to make the telecommuter concept a reality.
Even after this correction, CRM stock is not cheap nor will it ever be for as long as it continues to grow as fast as it does. Value is not an asset to it but rather how the company is able to continually beat its forecasts. So the 40% drop from $195 down to $115 is the argument of relative value but not in absolute terms. It still sports a nauseating price-to-earnings ratio. The simplest way to say this is that when the stock market recovers, CRM will be leading it up. So nibbling on some this week is a valid investment idea.
Source: Charts by TradingView
Microsoft is a dinosaur tech giant who has recently evolved and grew wings. Under the leadership of Satya Nadella they made the turn into the new cloud technology reality. It was touch-and-go for a long while but they finally committed and succeeded in adopting the subscription model for the future. Wall Street likes what it sees so they will give it the benefit of the doubt.
MSFT stock will recover in the next few months and it too can resume its rally. There are no intrinsic problems to it so I expect savvy investors to pick it up on the cheap. This is not to say that it cant get cheaper in the next few days. After an incredible rally that topped out in February, MSFT fell 30% so this puts the stock in stronger hands. Sharp corrections are sometimes necessary especially after an exponential upside explosion in price. Stocks need to shake out the weak hands before it can build further upside.
Steady rallies are generally better than what we had earlier this year, but for what ever reason investors bought stocks up in panic and this here is the flip side of of the phenomenon. COVID-19 headlines may have have been the trigger for the correction but the process was imminent. The ones who pay the costliest price are those who started chasing late and did not set proper stop loss levels.
This is important to note because when MSFT rallies back to the prior ledges like the one near $165 per share it will encounter selling pressure. The concept is the same for the other two stocks today.
Source: Charts by TradingView
Alibaba stock has held relatively well lately. This is because China suffered from covid-19 first and the effects hit BABA stock about a month earlier than MSFT and CRM. Investor perception is now that China is over the toughest part of this test so its stocks are behaving a little better. Only time will tell, but for now I can assume that Chinese tech stocks are just waiting to rip. Meanwhile Alibaba co-founder Jack Ma is making humanitarian headlines by helping fight the virus.
Case in point on Friday while U.S. markets fell 5% BABA stock closed in the green. Value is in the eye of the beholder and for now investors are sticking with it. Its not cheap because its still sells at 8.5 times its revenues and a 20 P/E. But thats not a reason to sell it especially when it shows strength in the face of adversity. This will attract investors because it is proving resilient in the toughest of times. Like the other two stocks, Alibaba management has also earned the benefit of the doubt so I dont see them committing unforced errors anytime soon.
The long term stock chart is still is constructive and in the hands of the bulls. It has been setting higher-lows for years so the trend remains intact while all other major market index trends have broken. Moreover it is now falling into support of a pivot zone dating back to 2017. More often than not these provide a strong base for a recovery rally.
We are still in mega-headline mode and they have been fantastic and they evoke extreme emotions. So caution is of the essence in any of these three technology stocks. It is not a good idea to take an entire position all at once for as long as we dont know exactly when and from what level sentiment well improve. This Thursday investors will face the first jobless claims report and it could be scary. I dont think Wall Street is ready to see three million new claims or more.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
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