Large-cap technology usually offers investors growth and quality, but the valuations aren’t always compelling. Good news: although the Technology Select Sector SPDR Fund (XLK) is holding up well on a relative basis, the benchmark technology ETF may be offering decent value for the first time in a while.
XLK “seeks to provide precise exposure to companies from technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment, instruments, and components,” according to State Street.
Apple Inc. (AAPL) and Microsoft Corporation (MSFT) combine for roughly 40% of XLK’s roster.
“Looking at the median tech stock, we think the median is 13% undervalued on a price to fair value basis,” said Morningstar in a recent note. “Hardware stocks within technology are down 16%, the software is down 14%, and semiconductors are 8% below our fair value estimate, again, on a median basis.”
Time For Value in Tech
Many investors embrace technology stocks and ETFs for the sector’s growth prospects and those catalysts, including 5G, are abundant. Some market observers believe the rally in chip stocks can continue, particularly if investors remain enthusiastic about 5G.
XLK seeks investment results that correspond generally to the price and yield performance of publicly traded equity securities of companies in the Technology Select Sector Index.
“We like wide-moat names like Microsoft, Salesforce, ServiceNow, and Tyler Technologies. All have wide moats,” notes Morningstar. “All have very sticky customer bases. And revenue is on a subscription basis and recurring, so there shouldn’t be too many interruptions to existing users as they shift to working remotely, and a good portion of this revenue is on a deferred revenue basis, so there’s good visibility.”
Technology has been a prime playground for investors looking to add growth and momentum factors to their portfolios. However, these days, it’s all about quality and many XLK components – Apple and Microsoft included – are quality stocks with strong balance sheets and the ability to endure the coronavirus crisis.
“For earnings ahead, all eyes will naturally be on COVID-19 and the demand outlook for technology. Many companies have pulled guidance. Few have actually provided updated guidance into the June quarter. There’s very little visibility as you can imagine,” said Morningstar. “PC demand actually seems decent as people prepare to work remotely, and smartphone demand is a bit softer, but there’s still anticipation of a bounceback later in the year.”
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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.