It was a tough start to the year for many of the best tech stocks, hurt in part by a sharp rise in the 10-year Treasury yield amid an increasingly hawkish Federal Reserve. But many of the best stocks have rallied nicely off lows after the S&P 500 confirmed a new uptrend on March 16. The Nasdaq composite followed through two sessions later on March 18.
Many of the best tech stocks with high P-E ratios like Tesla (TSLA) stock and Nvidia (NVDA) were hit hard earlier this year, along with security software stocks like CrowdStrike (CRWD) and Zscaler (ZS). But CRWD stock has rallied nicely off lows amid renewed signs of accumulation.
A rising interest rate environment isn’t good for the best tech stocks with high multiples because it makes for a more challenging operating environment. If the stock market senses any possibility of a slowdown in earnings growth from high P-E names, the selling will hit these stocks first. That’s what’s been happening lately as money flows into low P-E names in the energy, materials and agriculture sectors.
The stock market tide turned positive after follow-through days for the S&P 500 and Nasdaq in March. But market conditions have worsened as distribution days start to make their presence felt in the S&P 500 and Nasdaq composite. Through April 14, the S&P 500 showed five higher-volume declines since March 31. The Nasdaq showed four since April 5.
Best Tech Stocks To Watch
The best tech stocks to buy or watch aren’t hard to find, as long as you’re fishing in the right pond. Whether it’s a widely held name like Apple stock or a lesser-known name like Pure Storage stock, the best tech stocks share many common traits.
The best tech stocks boast strong fundamentals along with leading price performance in their industry group. Many also show favorable fund ownership trends.
The best tech stocks also show resilience in down markets. Use IBD Stock Checkup to quickly identify industry group leaders with the potential to be stock market leaders.
Screening for the best tech stocks to buy or watch is as easy as looking at the MarketSmith Growth 250, a daily screen of high-quality stocks. Click on any column header to sort the screen as you wish, either by those closest to their highs, stocks with the highest Composite Rating, or stocks trading up in price with the heaviest volume.
The best tech stocks to buy or watch aren’t guaranteed to be huge stock market winners. But they do have qualities seen in past stock market winners before big price gains.
Heart-valve specialist Edwards Lifesciences is know for its consistent track record of earnings and sales growth. Annual return on equity of 27% is excellent and points toward a strong management team.
Besides being a leader in medical technology for structural heard disease, EW is also a major player in critical care and surgical monitoring, as well as in transcatheter aortic heart-valve replacements, known as TAVR.
The TAVR procedure enables a surgeon to replace a patient’s faulty aortic heart valve via a small incision in a patient’s femoral artery. It avoids the need for breaking a patient’s breast bone to access the heart.
EW estimates that the global TAVR opportunity will double to $10 billion by 2028, implying a low double-digit compounded annual growth rate.
Q1 results from EW are due April 26 after the close. The Zacks consensus estimate is for adjusted profit of 58 cents a share, up 7% year-over-year, with revenue up 8% to $1.31 billion.
Composite Rating: 95 (on 1-99 scale with 99 tops)
Latest-quarter EPS % change: 2%
Latest-quarter sales % change: 12%
Five-year EPS growth rate: 17%
Annual return on equity: 27%
Up/down volume ratio: 1.1
Amid some stiff selling in the security software group, Palo Alto Networks has emerged as one of the leaders in the group. That’s why the stock’s relative strength line continues to hold near highs.
PANW still has the potential to be a strong price performer in the group after a bullish move over the 600 level. PANW soared out of a consolidation in late February, but sellers quickly knocked the stock down to its 50-day moving average. But buyers came in and offered support, and PANW rallied back to new highs in heavy volume.
At this point, it’s best to wait for a pullback before buying PANW stock. When it does, watch for buyers to come in and support PANW at its 21-day exponential moving average.
Shares jumped 18% during the week ended Feb. 25 after the company reported a 30% jump in revenue to $1.32 billion.
For its current fiscal year, Palo Alto forecast total billings of $6.8 billion to $6.85 billion, up 25%-26% from fiscal 2021. It sees revenue of $5.425 billion to $5.475 billion, up 27%-29%.
“In Q2, our company continued to benefit from strength across our three security platforms, driven by strong cybersecurity demand, organizations architecting for hybrid work and growing their hyperscale cloud footprints,” said Nikesh Arora, chairman and CEO of Palo Alto Networks. “On the back of this strength, notably in our next-generation security offerings, we are raising our guidance for the year across revenue, billings and earnings per share.”
Fiscal Q3 results are due on or around May 20.
Composite Rating: 95
Latest-quarter EPS % change: +12%
Latest-quarter sales % change: 30%
Three-year annualized EPS growth rate: 21%
Annual return on equity: 71%
Up/down volume ratio: 1.6
The company provides flash-based storage solutions for enterprise clients. Five straight quarters of accelerating revenue growth points to strong demand for the company’s products.
Shares gapped up and soared nearly 13% on March 3 after the company reported a 177% surge in quarterly profit. Revenue increased 41% to $708.6 million. Annual operating cash flow doubled to more than $400. CEO Charles Giancarlo said the company is no longer a niche player in the storage market, with strong growth among commercial, enterprise, government and cloud customers.
Pure Storage also added another $250 million to its current share repurchase program.
When selling in the technology sector has fully run its course, Pure Storage has the potential be a new leader.
PSTG gave a buy signal when it soared nearly 7% in heavy volume on March 17. It ran up to a high of 36.71 but selling pressure started to build in PSTG. Now, it’s testing support at its 50-day moving average.
Pure Storage’s next earnings report is due in late May.
Composite Rating: 97
Latest-quarter EPS % change: +177%
Latest-quarter sales % change: +41%
Five-year annualized EPS growth rate: 40%
Annual return on equity: 29%
Up/down volume: 1.7
There’s still a lot of carnage in the enterprise software group, with many former leaders still far off their highs., but Zendesk has recovered nicely off lows amid renewed signs of accumulation.
Zendesk provides a cloud-based, customer service platform, allowing companies to communicate with its customers via various channels. Over the past eight quarters, revenue growth has ranged from 23% to 32%.
In late February, activist investor Jana Partners asked Zendesk to institute significant board changes or a sale following ZEN’s failed $4.1 billion bid for SurveyMonkey parent Momentive Global (MNTV).
The announcement came just two weeks after the Zendesk spurned a $17 billion takeover offer by private equity firms.
Zendesk reports Q1 results April 28 after the close. Adjusted profit is expected to fall 18% to 14 cents share. Look for revenue to be up 29% $384.27 million.
Composite Rating: 90
Latest-quarter EPS % change: 45%
Latest-quarter sales % change: +32%
Five-year annualized EPS growth rate: 102%
Annual return on equity: 17%
Up/down volume ratio: 2.3
Paychex (PAYX) has a Composite Rating of 95 from IBD, helped by solid fundamentals and strong price performance in the stock market.
The company operates a human capital management software as a service platform, providing payroll, human resource , retirement and insurance services for small- to medium-sized businesses
A weekly chart for PAYX shows a couple of big accumulation weeks (heavy-volume weekly price gains) as the stock formed the right side of a cup base. That’s a positive because it shows institutional investors were in there buying.
PAYX stock reversed nicely off lows on March 30, ending with gain of 3.3% in higher volume after the company reported a 20% rise in quarterly profit. Revenue increased 15% to nearly $1.28 billion.
Full-year guidance was also bullish. Paychex now sees annual earnings growth of 22.5% to 23%, up from prior guidance of 18% to 20%. It sees full-year revenue growth of 12% to 13%, up from prior guidance of 10% to 11%.
“We had a strong calendar year-end and selling season, delivering a record quarter for new sales revenue and maintaining high levels of client retention,” said Paychex CEO Martin Mucci in the earnings release.
Paychex is taking a breather now, while holding above its 21-day exponential moving average, a key short-term support level to watch. It’s been an orderly decline so far as a handle forms. The handle area is where the last remaining sellers get shaken out of a stock before a breakout.
But breakouts need a healthy stock market as a tailwind, and the market remains in a distribution phase.
Composite Rating: 95
Latest-quarter EPS % change: +20%
Latest-quarter sales % change: +15%
Five-year EPS growth rate: 9%
Annual return on equity: 38%
Up/down volume ratio: 1.o
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.
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