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Technology stocks have had a tough year, according to Citi, but now may be a buying time for investors who want to prepare for future growth. The firm recently upgraded its IT sector rating to overweight from a longstanding under-rating. Software, services, and process equipment were upgraded to an over-rating, while semiconductors were upgraded to market grade. “The high-level outlook is that the tech sector (and the upside of the S&P 500) has taken the brunt of the multiple squeeze associated with sharp increases in both nominal and real interest rates earlier in the year,” the strategist wrote. Scott Hronert in Friday’s post. “In turn, we expected that any implied spike in Fed rate expectations would trigger a decline in the value of the sector.” He added that S&P 500 growth stocks are outperforming value stocks after their June lows. In addition, according to Hronert, any S&P 500 rally must include technology. “As a reminder, the tech sector, which makes up almost 27% of the S&P 500, is critical to any rise in the index,” he wrote. “Similarly, the software and services industry group, with a weight of 13%, is the largest component of the index.” Of course, tech heavyweights are also important. The sector is largely dependent on Apple and Microsoft, which make up 45% of the weight. Technology Strategies and Best Solutions There are several key strategies that Citi likes best in the technology sector. The group’s leading model indicator remains constructive in the process equipment sector. And analysts see the strength in revenue, sales and cash flow. According to the note, it could take several more months before a positive fundamental reversal in semiconductors. “But our proprietary evaluation model motivates us to move to a more constructive approach as early as possible,” Hronert wrote. Citi’s best back office software solutions are the popular names Intuit and Workiva. “INTU’s portfolio expansion creates an engaging multi-directional cross-selling story (Credit Karma ↔ TurboTax, QuickBooks ↔ Mailchimp) as INTU becomes more mission critical,” writes analyst Steve Enders. He added that the fears of macroeconomic bears are already taken into account in the price of the company. Intuit shares are down 36% year-to-date and more than 42% from a 52-week high. For Workiva, Citi sees solid core business credit support in reporting for a company with a strong presence in large enterprises, with the prospect of investing in new ESG capabilities. For IT equipment, Citi is choosing Jabil, a company that has had solid sales and earnings in recent quarters and that trend is likely to continue. “Investors do not fully understand the strength and position of Jabil in the automotive sector, which now accounts for only 10% of total sales; but given the increase in the number of models and sales of electric vehicles, we see this as a significant element of growth, ”the analyst writes. Jim Suva. “We also note that post-COVID medical device spending returns are a positive development.” Workiva shares have fallen 38% since January, while Jabil shares have fallen 12% over the same period. The firm is also bullish on Netflix stock, which it sees as the best in streaming. According to the note, the stock is currently trading at an attractive entry point. “Our optimistic stance on Netflix is largely based on the tangible benefits we expect to see from the firm’s introduction of the ad tier,” wrote Jason Bazine. “We also see an opportunity for the firm to generate additional cash flow through price increases to generate additional consumer surplus.” As of Thursday’s close, Netflix stock was down more than 65% from its 52-week high. The note also cites Elastic, Atlassian and KLA as top software and semiconductor buyers.
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