8 Tech Stocks To Consider In A Bear Market – Here’s Why

8 Tech Stocks To Consider In A Bear Market - Here's Why

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Tech investors have been under siege recently as the Invesco QQQ ETF ( QQQ ) entered a bear market last week. The ongoing Russia-Ukraine conflict also deteriorated as Russia intensified its indiscriminate bombing campaigns. Furthermore, the potential for dragging China into the mess cannot be ruled out, which we discussed in a recent article .

But, we believe that investors need to consider that the pessimism in the market is already at a high level, even though not extreme. As a result, the market has been pricing in a significant amount of risk, resulting in the first US tech bear market since March 2020.

Therefore, we believe pockets of opportunities have emerged that astute investors can capitalize on. But, it’s essential to focus on only high-quality companies with a strong moat. We believe these companies could be the first to recover from the massive sell-off subsequently.

We discuss three key metrics to help you focus on selecting your stocks. We also discuss eight of our preferred picks that could help sustain your tech portfolio during the bear market and potentially worsening conflict. Key Metrics 1: Buy GAAP Profitable Tech Stocks

It’s certainly possible that unprofitable growth stocks would follow the subsequent recovery. However, if you are more prudent, it wouldn’t be a good idea to bet on these stocks in the near term, as there could be more volatility. Therefore, focusing on profitable stocks on a GAAP basis is critical. We believe GAAP profitable companies could help support a floor in its stock price and absorb further selling pressure. Investors could continue to rotate away from unprofitable growth stocks into profitable stocks to protect their portfolios.

But, investors must be careful to make sure that they avoid the non-GAAP adjustments made by these companies. For example, many companies adjust OpEx components such as stock-based compensation (SBC), thus improving the optics of their P&L. But, high-quality companies never needed to focus on such adjustments, as they are already GAAP profitable. Key Metrics 2: Free Cash Flow Profitability

We perform discounted cash flow (NYSE: DCF ) analysis on every stock we own. While we also perform other relative valuation measures, we believe a DCF analysis is telling. Therefore, we also consider FCF profitability as a critical measure of the company’s quality. Solid companies generate robust free cash flows in bull or bear markets. Their FCF also indicates the resilience of their business models during periods of industry cyclicality that affect their revenue growth.

Furthermore, companies with solid FCF can often use sharp market sell-offs to authorize stock buyback programs to return value to shareholders. In addition, they can also invest aggressively during such periods to improve their competitive edge against their peers. Therefore, investors should always consider robust FCF profitability as a hallmark of a high-quality company. Key Metrics 3: Reasonable FCF Yield

Ultimately, we are investors. Therefore, we also want to avoid overpaying for an investment no matter the strength of its business. Using an FCF yield to evaluate the soundness of your stock’s valuation ensures that you avoid non-FCF profitable stocks. If your stock is backed by robust FCF yields, we believe it would help buffer the stock against high volatility in the near term. Furthermore, it can also act as a floor in the stock price decline if its outlook remains strong. 8 Stocks To Consider In A Bear Market

We discuss eight tech stocks for investors to consider in a bear market. Apple

AAPL stock NTM FCF yield % & NTM EBIT multiple (TIKR) Apple FCF margins % (LTM) (S&P Capital IQ) The Cupertino-based company successfully launched its iPhone SE 5G that comes with iPhone 13’s A15 SoC. Furthermore, its Mac Studio demonstrated the prowess of Apple silicon as it unveiled its M1 Ultra chip. Apple’s flagship iPhone segment has continued to lead in sales and engineering clout since “divorcing” Intel ( INTC ). Furthermore, it has also led to gains in its Mac segment. It also showcased Apple CEO Tim Cook & Team’s ability to navigate the chip supply chain even as the industry dealt with persistent shortages. It has astutely positioned itself at the front of the queue with its suppliers. Its massive scale has also ensured its supply visibility and security.

Furthermore, the company is also GAAP profitable, and its margins have continued to improve as its services segment scales. Apple is also a massive FCF machine with its last-twelve-months (LTM) FCF margin reaching 26.9%.

Nevertheless, its valuation metrics suggest that AAPL’s […]

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