After a great run for the tech sector over the past 18 months, September was a bump in the road. The Nasdaq 100 Index dipped 6% off its recent summer highs. Many speculative tech companies fell a lot further than that.
There was a particularly aggressive bout of selling in the sorts of pure growth companies favored by prominent investors such as Cathie Wood’s Ark Invest. Interest rates have been a focal point for the sell-off. Traders are preparing for stricter monetary policy as inflation continues to mount and the Federal Reserve points to imminent measures to tighten monetary policy in response.
Historically, tech stocks have been huge beneficiaries of low interest rates: People choose to own growth when returns on fixed-income products are poor. Investors fear that this virtuous cycle could reverse as a post-pandemic economy rebounds and interest rates surge. That said, this tech sell-off could be a chance to grab growth stocks at more attractive prices. Companies with strong current profitability seem particularly compelling given the macroeconomic backdrop.
With that in mind, here are five of the best tech stocks to buy for October:
— Texas Instruments Inc. (TXN)
— Qualcomm Inc. (QCOM)
— Cisco Systems Inc. (CSCO)
— Facebook Inc. (FB)
[Sign up for stock news with our Invested newsletter.]Texas Instruments Inc. (TXN)
One of the huge themes in technology coming during the pandemic has been the great semiconductor shortage. A burst of demand and strained supply chains have led to dramatic shortfalls. This has caused price spikes and production stoppages in industries such as automobiles and home appliances. Companies that sell analog semiconductor chips in particular have had a good run. Texas Instruments is one such case.
TXN is a global leader in semiconductor products for detecting real-world input and converting it into data. This is vital for autos, the Internet of Things, remote monitoring devices and various other such applications. The pandemic has been a boon for these uses as more and more companies set up remote workflows that need connected devices. Texas Instruments is riding the wave — it’s forecast to grow earnings 28% this year. At just 24 times forward earnings, share prices don’t look overheated. The company also rewarded shareholders with a juicy 13% dividend hike in September.
Qualcomm Inc. (QCOM)
Qualcomm is another solid semiconductor pick. The company is the leader in smartphone chips. It made a fortune selling its Snapdragon chips for 4G mobile internet and it is set to repeat that story as the 5G rollout cycle reaches full steam. The 5G deployment has been delayed by the one-two punch of the pandemic and the ensuing supply shortages. However, the need for faster mobile internet isn’t going anywhere. Furthermore, the security concerns around Chinese suppliers such as Huawei has improved the competitive position of American firms in the industry.
Qualcomm also won key legal battles against Apple Inc. ( AAPL) to safeguard its royalty stream on its patents. This offers investors a chance to buy with a higher level of safety thanks to the improving price and reduced legal risk. Shares trade at an estimated 15 times 2021 earnings, and analysts see those earnings increasing 12% in 2022. That’s a bargain.
Cisco Systems Inc. (CSCO)
Sticking with the infrastructure theme, there’s Cisco. The company has dominated the networking hardware space for 20 years now. Many investors have grown bored with the name and now view it as a commodity. Shares pay a strong dividend and trade at just 16 times forward earnings.
Below the surface, however, Cisco is charting a new direction.
An increasing portion of the company’s business comes from software and subscription products. Instead of selling a networking product once, Cisco is transforming its model toward infrastructure and network security as a service. This could cause a dramatic increase in Cisco’s price-earnings ratio and other such valuation multiples. A decade ago, Microsoft Corp. ( MSFT) was trading at about 10 times earnings and viewed as a tech stock afterthought. Now, it’s one of the most successful tech stocks around. Cisco’s efforts at a similar self-improvement effort could reward shareholders dramatically. And, in the meantime, its robust profitability offers some safety if the tech correction steepens.
Facebook Inc. (FB)
Facebook has slid more than 10% off its recent highs. Some of that is simply due to all the Big Tech stocks selling off. However, Facebook has been under particular pressure. Much of this is can be chalked up to bad publicity, especially after a Wall Street Journal report surfaced about Instagram’s ill effects on teenagers’ mental health. The company shelved a planned Instagram Kids product after the controversy.
As with the Cambridge Analytica scandal, look for this latest controversy to eventually blow over. It’s important to remember that Facebook is far more than just its namesake platform or Instagram. There is WhatsApp, Marketplace, and its efforts in virtual and augmented reality. Additionally, the vast majority of Facebook users live outside the U.S., and aren’t paying attention to every negative media story about the company in the American press. Despite the assorted controversies, Facebook has tripled its revenue since 2016 and should continue to see strong growth thanks to a rapidly rebounding online advertising market.
After a strong year, Alphabet now finds itself in a bit of a slump. Its stock price dropped by about $240 per share in September, marking a nearly 10% move off its all-time high. However, the pros outweigh the cons for Alphabet right now. In particular, it’s noteworthy that Alphabet’s shares only trade for a moderately higher P/E ratio than the S&P 500 as a whole, even though Alphabet’s business has grown its revenues and earnings far more quickly than the median stock in that index.
Like Facebook, the core Google advertising operation has come roaring back after the pandemic. In addition, Alphabet has one of the fastest-growing cloud computing divisions. Its “moonshot” investments such as self-driving unit Waymo offer another potential way to win, as well.
