Value in Select Software Stocks Could Benefit QQQ | ETF Trends

The S&P 500 officially entered a bear market on Monday, confirming what many market participants already knew: Previous leaders in the growth stock arena are mightily faltering.

Add persistently high inflation, talk of accelerating interest rate hikes by the Federal Reserve, and rising recession fears to the equation, and it’s understandable that many investors are apprehensive regarding growth-heavy assets such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).

While now might not be the time to proclaim value as permeating the rosters of QQQ and QQQM, some analysts suggest that there are recession protection opportunities with some of the software names found on the rosters of these exchange traded funds. Better still, some of these QQQ and QQQM holdings are trading at attractive multiples.

“Adding to their potential appeal: For software companies focused on data management and protection for corporate clients, their business models can be resilient in the face of an economic slowdown. Worries about the potential for a softening of the economy, and even a potential recession, have grown as the Federal Reserve has signaled that raising interest rates to fight inflation is its current priority,” wrote Morningstar analyst Jakir Hossain.

QQQ and QQQM both track the Nasdaq-100 Index, meaning that the ETFs are significantly overweight to technology stocks. As of June 13, the Invesco funds allocate more than half their respective weights to that sector.

Interestingly, some of the more compelling opportunities among the fund’s software holdings are found at the smaller end of the spectrum. Think names such as Datadog (NASDAQ:DDOG), Okta (NASDAQ:OKTA), and Splunk (NASDAQ:SPLK), among others.

“Even if there is a recession, a customer’s expenditure in these services will not take a nosedive,” said Morningstar equity analyst Malik Ahmed Khan. “A lot of these companies have integrated themselves into their customer’s IT expenses; giving them up would open up potential security and operating vulnerabilities.”

Morningstar views Datadog, Okta, and Splunk as not entirely recession-resistant, but adds the trio are among the enterprise software names that are currently undervalued. Additionally, these firms and other QQQ/QQQM holdings are levered to what could be a lengthy tech upgrade cycle.

“The biggest tailwind behind these companies is the shift to digitally transform businesses. A lot of companies currently have outdated IT infrastructure,” Khan said.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.