Tech stocks: ‘There’s clearly a buy signal’ amid the sell-off, strategist says

JoAnne Feeney, Advisors Capital Management partner and portfolio manager, joins Yahoo Finance Live to discuss Microsoft earnings, software stocks, and the outlook for tech as the Fed prepares its policy decision today.

Video transcript

- After a volatile few days in the markets, the question is similar among many investors. Buy, sell, or hold? Let's explore this more with Advisors Capital Management Portfolio Manager Joanne Feeney. Joanne, nice to see you. Thanks for taking some time here. Well, we were just talking about these Microsoft results. And you've covered the tech industry for some time. Is there enough juice in this Microsoft report and their outlook just to settle markets down here a bit?

JOANNE FEENEY: Well, it certainly helps. I agree. Good morning. Microsoft obviously is a bit of a bellwether. It's giving us a really strong signal, though, on the continued strength of demand in the cloud computing space. And that not only is a positive signal for Microsoft, but for other suppliers into data centers that enable the cloud, you know, whether it's a Broadcom or the software suppliers. It also signals continued strong demand for cybersecurity.

And given the tech pullback we've had, we've seen now a lot of valuations come in that is really creating a pretty good opportunity for not just a conservative investor looking to the long term, but also for the more aggressive growth oriented investor because some of these opportunities have become extremely attractive after these pullbacks.

- Joanne, it's Julie here. I mean, and I'm curious, as we talk about these growth stocks what growth is going to look like in the coming year. I mean, most of the discussion around the tech companies has been around margins and valuations and not so much about actual growth. So I guess, what do you think the pace of growth is going to be like for large-cap tech going into the next year?

JOANNE FEENEY: Yeah, Julie. That's exactly the right question to focus on because with all this chatter about what's the Fed going to do and what are rising interest rates going to do to the broader economy, you really have to look at two different segments of the economy. Yes, growth is going to slow down from last year naturally because we had that recovery from the worst of COVID really pumping up the numbers last year. Going forward into this year, companies like Microsoft, Broadcom, Apple, they still have very strong drivers in place. And they should be among the fastest growers in terms of revenue and earnings.

And that's why we think that these valuations really do start to turn around and come back up after what we saw really was a reset because of the expectation that interest rates would move higher. I'm not going to try to put a number on that. Companies are very different depending on which end markets they're in. But low double digit growth for some of these would not be surprising. And that's a pretty good environment for the tech investor right here.

- Joanne, in terms of just pure market mechanics, just with the action we have seen this week, are you seeing any buy signals in the market?

JOANNE FEENEY: Yeah. That's a little bit of a trader-type question. What we're seeing in terms of signaling I guess is more of a dislocation between intrinsic value of some of these companies that have pulled back 20%, 30%, 40% and you valuations. And so, yeah, I mean, in terms of an investor looking for a great way to position for appreciation over the next two, three, four, or five years, there's clearly a buy signal here among some of these stocks, whether it's, again, something like Microsoft that has pulled back sharply and Apple and Amazon, for example.

We do think that that separation that we're seeing between intrinsic value, their ability to grow, their ability to continue to increase profits over time, is a pretty attractive opportunity for the longer-term investor. I don't know whether we're done with the sell off. We're going to see what the Fed says today. I don't think they're going to shock us, really. But clearly we're in a period of elevated uncertainty. And that means more volatility. So while we think it's a good idea to stay exposed to tech and perhaps increase your tech exposure at this point, we do think it could be a little bit of a bumpy ride between now and say, you know, six months or a year from now. But that shouldn't dissuade the long-term investor at this point.

- And, Joanne, we keep showing Broadcom, which is, I guess, a deep tease to say that you like shares of Broadcom. So when we talk about tech, why semiconductor specifically? And then why Broadcom even more specifically within that sector?

JOANNE FEENEY: Yeah. We like that space for a couple of reasons. Number one, obviously semiconductors have been trying to-- semiconductor companies have been trying to increase their capacity because there's such strong demand. And what's different now than, say, 10 or 20 years ago is that semiconductors sell into so many different end markets that it's created a broader based demand environment. And so not just cars and automated features in your home, factory automation, just consumer electronics, just everywhere.

So that creates a broader based demand environment, which is really positive for the companies. And it has damped down volatility in their sales and earnings over time. So we do like the space. Plus we're seeing more capacity come online this year. Starting in the middle of the year, more factories will be up and running. And that's going to create greater capacity for them to generate sales and profits.

Broadcom is an even more diversified company because it has software, it has storage that it sells into, it has security software as well, and it's selling into enterprises and cloud. And right now, enterprise demand is really rising. They got constrained last year because of COVID. They couldn't do a lot of the spending and improvements of their IT infrastructure that they wanted to do.

And now that's starting to come back online. And in addition, Broadcom sells into the iPhone. And that's we think a place where they continue to get more and more dollar content year after year. And it's something that we think is going to really boost their earnings over time. So it's relatively stable. It has very good end market sells into. And also for folks that like to have a little bit of a dividend, the dividend yield is pretty nice compared to the S&P as a whole.

- Well, staying on this theme of diversification, Joanne, you also like BorgWarner. What's the play there?

JOANNE FEENEY: Right. So back to semiconductors. So the auto industry, as we all know, has been constrained in their ability to increase the supply of cars because of a lack of chips. And now with more and more of that chip capacity coming online, there's going to be more ability to produce those cars. And BorgWarner is really appealing because it sells drive trains and other features that improve the fuel efficiency of cars and the power of cars for fuel efficiency and for pollution controls.

So it's an area where all the car manufacturers are moving towards. So just increasing car manufacturing helps them. Moving towards more efficient cars helps them. And they're also positioned to supply more and more over time into electric vehicles. So we really like positioning in that. And the stock has not done as well as we think it's going to over the next couple of years. So good opportunity to get exposure to what looks like a structurally growing area.

- Interesting picks. All right. We'll leave it there. Advisors Capital Management Portfolio Manager Joanne Feeney. Always good to see you. We'll talk to soon.