Here’s an investor’s guide to hot tech trades in Q2
Momentum favors biggest companies and chipmakers
For investors who believe that a broad market trend can be their friend, firstquarter moves among large-cap tech stocks may point to where trading goes next in the volatile sector.
After looking at the performance of the 60 biggest technology issues, several trends emerge. First, bigger was better. Of the 30 most valuable tech stocks, 22 rose.
But among the next 30 (No. 31 to No. 60), only 11 did, while 19 fell in value.
So the top 30 had twice as many winners than the next 30, driving a huge shift in market value toward the very largest stock issues.
Verizon (VZ) gained $38 billion in market cap through March 31 — or more than the total value of a long list of smaller firms that were stock laggards, including eBay (EBAY), LinkedIn (LNKD) and Twitter (TWTR).
Along with AT&T (T), which added $34 billion in value, the trading in Verizon shows that tech investors have started the year with a strong preference for safer income stocks.
Conversely, firms in a variety of sub-sectors got pounded — along with their shareholders.
Shares of hardware makers Nokia (NOK) and Lenovo plunged 16% and 18%, while most Internet issues ( big and small) were bad bets.
The damage went far beyond LinkedIn (LNKD) and Twitter (TWTR), which were the very worst performing tech stocks of the period.
Six of the 10 biggest losers in the tech sector were Internet stocks, including double-digit losses for Amazon (AMZN) and China’s JD.com (JD). AMAZON’S SLIDE WAS AN ANOMALY In a coincidence that shows how volatile Internet stocks can be, Facebook (FB) gained $30 billion in market value, the most outside of telecom (and the same amount Amazon lost).
By stark contrast, only two of the biggest 20 winners were Net stocks.
Amazon lost more in market value to start the year — $30 billion, down 12% — than any other tech issue.
One other trend worth considering: Seven of the 20 biggest winners were either chipmakers or chip-equipment makers.
That sub-sector tends to do well at the start of a tech investment upgrade cycle.
Yet growth in the traditional market for chipmakers — selling the brains of PCs and servers — has been weak. CASHING IN ON CHIPS So why the strength in chips, which had more big winners in the quarter than any other sector?
I believe that tech investors during the first quarter started to see the growth potential in new consumer markets, including automobile-control platforms and home devices connected to the Internet — the Internet of Things.
That bullishness drove stock gains of at least 5% in the quarter for Nvidia (NVDA), which makes graphic chips; Analog Devices (ADI), which makes programmable chips; and Broadcom (BRCM), which makes communication chips.
Chip-equipment makers KLATencor (KLAC) and Lam Research (LRCX) also rose 5%, during a quarter when the NASDAQ felt 2.7%. And Applied Materials (AMAT), the largest chip-equipment maker, gained 14%, a performance putting it among the best five tech stocks so far this year.
If you plan to put more money in technology stocks in 2016, and you believe the start of a year can point the way for the rest of it, here’s what tech-stock trading pointed to in the first quarter:
uBullishness for shares of the biggest companies
uBearishness for smaller firms and Internet stocks (except for Facebook)
uAggressive bets on the chip sector in a slightly down market for tech
Given that last one, I’ll take a deeper look at chipmakers next week. Good luck with all your trades.