Top 5 Tech Stocks for a Recession Rebound

Recession Obsession

It’s been three weeks since I wrote Top 5 Stocks to Buy For the Second Half of 2022, and investor sentiment has quickly gone from fear to greed. Although recession fear has dominated the headlines in recent weeks, proponents and opponents of the historical definition behind “recession” don’t seem to bother the stock market as it continues its rally. The question is whether or not the rally is sustainable.

CNN Fear & Greed Index Comparison 7/25/22 vs. 8/16/22

With a four-week winning streak, will the stock market rebound continue its run? The billion-dollar question is whether this run is a bull market or a bear market rally. The S&P 500 is +17% from June lows. And while inflation has likely peaked and there’s been improvement, the economy is still battling 40-year high inflation; consumers are feeling the pain and savings have all but disappeared; and lifestyles are being propped up by credit, which is not a good sign.

Although the markets appear to be responding favorably to the Fed’s recent comments about inflation, the rallying response may be a misunderstanding that there will be a shift from 75 basis point hikes to a more dovish pivot on the heels of moderating CPI. And while there’s uncertainty about whether or not we’re in a bear market rally or the start of a bull market, it seems counter-intuitive to have a bull market during a recession. But all indications point to the likelihood of recession or a soft-landing more than not – if we’re not already in one. As the old investor saying goes, “Don’t fight the Fed.”

Don’t Fight The Fed

The fed is hell-bent on controlling inflation and aims to continue its balance sheet reduction via quantitative tightening and rate hikes. And while there’s been some debate on whether the Federal Reserve’s recent comments will lead to a shift and Fed easing, the quick and easy “transitory” solution may result in history repeating itself. As Economist and President of Queens’ College, Cambridge University, Mohamed El-Erian recently wrote in Bloomberg:

“Over the last 18 months or so, the quick and easy interpretation of inflation data has turned out to be incorrect. Will it be different going forward? Markets sure hope so. Federal Reserve officials seem more cautious, and rightly so. The markets’ latest narrative pivot is not the right one for the world’s most powerful central bank…Opting for the “transitory” characterization was quick and easy to do, especially because it did not require any change in approach.”

Should the Fed ease, investors may want to consider putting their foot on the accelerator when it comes to their investments. If the Fed continues to tighten to control inflation, don’t fight the fed. Investors may want to consider stocks that can weather all storms, in diverse sectors, with quality investment characteristics that can benefit from many tailwinds throughout the year.

Seeking Alpha’s Quant Ratings and Factor Grades System provides powerful cues when markets rotate from irrational exuberance to alarming confusion, helping investors limit risk while maximizing returns. Stocks with shared traits of value, growth, profitability, rising earnings revisions, and momentum are best equipped to withstand a pullback. I have selected five stocks that have performed well in the current and prior environment. Check out our top five tech stocks for a recession rebound below.

Top 5 Stocks Amid Inflation And Potential Recession Rebound

Who doesn’t love technology? In fact, I have missed investing in these stocks as they can have such strong growth stories. And in today’s day and age, tech makes the world go-’round. But one of the crucial pieces when investing in the sector is diversification, especially when selecting growth or tech stocks in a rising rate environment. My stock picks are in unique industries and should offer something different for each investor.

If you’ve read some of my other articles, you know that I am a big fan of semiconductors that have proven resilient throughout the downturn. Chips are the essential components of many electronic devices, communications, health, and transport, making them a recession-resilient option. Let’s dive into my first two picks.

Semiconductors Stocks

Strong valuations, earnings, and tremendous momentum have prompted me to select two chip stocks. I believe chips are a favorable long-term investment that has benefitted from chip shortages. With solid fundamentals, tailwinds, and benefits to countless other industries, semiconductors are in high demand worldwide. Daqo New Energy Corp. (DQ) and Photronics, Inc. (PLAB) are two of my top tech stocks according to the quant rating with +$1B market cap, and in the semiconductor industry.

1. Daqo New Energy Corp. (DQ)

• Market Capitalization: $5.11B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 8/16): 1 out of 632

• Quant Industry Ranking (as of 8/16): 1 out of 30

Daqo New Energy Corporation is headquartered in Shanghai, China, and a strong Stock For a Terrible Market, also offering excellent characteristics for a rally. It is known for manufacturing and selling polysilicon to photovoltaic products used in high-purity solar power solutions. Year-to-date, the stock is +62%, and over the last year, +36%. Yes, you read that correctly, up 62% this year. Trading under $70 per share, DQ comes at a tremendous discount. Possessing a forward P/E ratio of 2.56x, DQ comes at a -88.99% discount to the sector and maintains a forward PEG of -77.30% difference to the sector.

As global economies search for alternative energy sources, DQ should benefit from its renewable business, as evidenced by its continued momentum and consecutive earnings growth.

Operating at full capacity and producing 35,326MT of polysilicon over the quarter, DQ delivered another stellar top- and bottom-line performance in the second quarter. DQ’s factor grades instantly showcase a stock’s investment characteristics relative to the sector. As evidenced by the below factor grades, Daqo has A’s across the board, with tremendous growth, profitability, and momentum.

DQ’s EPS of $8.18 beat by $0.54 and revenue of $1.24B beat by more than 181% year-over-year, prompting Longgen Zhang, DQ Chief Executive Officer, to express his pride over record Q2 results:

“We are very proud to deliver an excellent quarter with record production volume and profits…Net income attributable to Daqo shareholders was$628 million, an increase of 17.2% from $535.8 million in the first quarter of 2022 and an increase of 170% from $232 million inQ22021. Our cash position at the end of the quarter was $3.3 billion, an increase of approximately $2.2 billion from $1.1 billion at the end of Q1 2022, reflecting our strong cash flow generation. Cash and banknote receivable combined balances reached $4.6 billion. Operating cash flow was $1.1billionforthe first six months of this year.”

Growth and profitability coupled with DQ’s industry-leading track record and polysilicon sales volumes paint a solid outlook as the push for green energy grows. DQ takes advantage of low production costs to maintain a competitive advantage.

Over the last 90 days, eight analysts provided FY1 Up revisions, and DQ’s high purity polysilicon material and technology improvement projects are a top priority for Q3. Better than expected operational performance in the year’s first half has resulted in DQ increasing its guidance and annual production volumes from 120,000 – 125,000 MT to 129,000 – 132,000. The company has faced headwinds due to lockdowns. And although some investors are concerned about geopolitical risks when investing in Chinese stocks, the overall performance of DQ has been stellar. Its discounted price, tremendous growth, and profitability are key considerations when investing in this stock. If China is not the right geographic location for you, consider some of the Top Semiconductor Equipment stocks in the United States.

2. Photronics, Inc. (PLAB)

• Market Capitalization: $1.54B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 8/16): 7 out of 632

• Quant Industry Ranking (as of 8/16): 2 out of 30

Another chip stock that managed to withstand the substantial drawdowns experienced by other tech stocks this year is a semiconductor equipment company, Photronics, Inc. Along with its subsidiaries, PLAB manufactures and sells photomasks, the opaque plates that produce chips for high-performance electronics and electrical and optical components.

Despite supply chain disruptions, Photronics has managed to capitalize on the semiconductor boom, is +79% over the last year with bullish momentum, and is trading at a discounted price. PLAB’s forward P/E of 13.25x is more than a 43% discount to the sector, and the current PEG of 0.12x is a -73.57% difference to the sector, an excellent opportunity to capitalize on this undervalued stock.

Outperforming its sector peers quarterly, PLAB possesses an A+ momentum grade, rising earnings outlooks, and tailwinds, including tech advances superior to its competitors. In addition to a global footprint in 11 strategic locations, FQ3 guidance came in above consensus.

I believe Photronics’ stock and its growth and profitability showcase a positive outlook. PLAB is outperforming the broader market index and has long-term contracts into 2024. EPS of $0.49 beat by $0.14, and revenue of $204.51M beat by $12.14M, resulting in three analysts revising their earnings up.

PLAB showcases that its high free cash flow and clean balance sheet offer investors great investment potential, despite any headwinds. During the 2022 Q2 Earnings Presentation, PLAB CEO Frank Lee, Photronics, said,

“We once again delivered record revenue in the second quarter, improving 8% sequentially…In addition to the top-line growth, we expand our gross and operating margins. Gross margin was 36%, and operation margin 25%. The end result was EPS of $0.49. Cash generation was also strong as we ended the year with $247 million in net cash, which positions us to continue investing in profitable growth opportunities. As CEO, I fully commit to continue our organic growth strategy, the revenue growth, and the margin expansion, and also we’ll keep exploring additional growth initiatives.”

With a solid network and what appears to be a long runway ahead, PLAB is not only a strong buy recommendation according to quant ratings, but it’s also one of my top tech stocks with upside potential.

Cloud and Software Stocks

Cloud-based and many software stocks tanked at the beginning of the year as investors feared inflation and interest rates. They really did get hammered. While some investors capitalized on bargain basement prices, others want to get in on the action now, despite the cloud index -34% YTD. Still, demand for the services amid digital transformation for businesses may prove fruitful for investors willing to consider the following three stocks for portfolios.

3. Splunk Inc. (SPLK)

• Market Capitalization: $18.48B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 8/16): 36 out of 632

• Quant Industry Ranking (as of 8/16): 3 out of 192

Application software company Splunk Inc. is a beaten-down software and cloud solutions company that streamlines security operation workflows, uses machine learning and offers many steaming and data management capabilities. Over the last year, the stock is -20%. Despite Splunk’s profitability rating of D+ due to losses on the heels of rising interest rates that affect growth stocks, the company is poised to benefit from Big Data tailwinds, which is why I’ve selected it as one of my top 5 tech stocks.

The rise of remote work and cybersecurity cloud applications are gaining traction. Splunk’s B- valuation, solid growth, momentum, revisions grades, and excellent Q1 earnings have raised guidance. In addition to 2022 Q1 EPS of -$0.32 beating by $0.43 and revenue of $674.08M beating by 34.27% year-over-year, 33 analysts gave FY1 Up revisions over the last 90 days.

In addition, the momentum for SPLK is strongly bullish, with analysts calling the company overbought as shares are actively being purchased, driving the stock price higher.

Despite the selloff in tech stocks, Splunk’s price point, valuation, and forward guidance offer investors a potential opportunity to get in on the action. As companies undergo digital transformations and individuals transition to remote work or opening small businesses, investors looking to SPLK in their portfolio may gain due to Splunk’s unique product offerings. Impressive Q1 growth of 32% included upselling products and maintaining a 130% retention rate.

“Over the past couple of years, as Splunk transformed itself to a cloud company, it also positioned itself on a growth path with the critical ingredients to grow from over $3 billion in ARR to $5 billion and beyond. Underlying all of this is a loyal customer base that continues to expand their usage of Splunk…which I believe we can drive long-term durable growth while progressively increasing operating margins and cash flow,” said Gary Steele, Splunk Interim CEO.

Although Splunk may not have had the best price performance over the last year, there’s room for growth, and the stock is undervalued. Accelerating growth, strong bookings, and momentum are reasons to consider this strong buy for a portfolio and the next stock pick.

4. Calix, Inc. (CALX)

• Market Capitalization: $3.71B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 8/16): 42 out of 632

• Quant Industry Ranking (as of 8/16): 6 out of 52

Cloud and software platform Calix, Inc. is known for its dedication to communication services that simplify subscribers’ businesses and working and learning from home options. Calix’s overall factor grades are attractive despite trading at a relative premium. With stellar momentum, the stock has outperformed its sector peers quarterly. Over the last year, the stock is +29% and has beat top and bottom line results for 12 consecutive quarters.

The latest earnings bear resulted in a topline surge of 12%, beating consensus by $6.02M, with an EPS of $0.22 beating by $0.03. New services and broadband-as-a-service have helped drive growth, and given better than anticipated results for Q2; the firm has been able to forecast YoY growth of ~25% for Q3.

Although Calix may experience some headwinds amid rising prices and inflation concerns, “the enormous secular opportunity we are capitalizing on grows every day, and the Calix team is committed to executing with excellence to help our customers simplify their businesses, excite their subscribers, and grow their value,” said Carl Russo, Calix CEO. For a little more risk, you can find small and mid-cap our quant ranked Top Communication Equipment Stocks.

5. Super Micro Computer, Inc. (SMCI)

• Market Capitalization: $3.48B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 8/16): 5 out of 632

• Quant Industry Ranking (as of 8/16): 1 out of 31

My final stock pick develops and manufactures high-performance server and storage solutions and offers support services for companies. With primary operations in the U.S., Europe, and Asia, as Seeking Alpha author Mayank Sharma writes, “Super Micro Computer is introducing future-proof systems to accommodate multiple integrated technologies. Continuous investment in R&D gives SMCI a competitive edge…Super Micro Computer: Best In The Industry At A Cheap Valuation.”

Trading at an extreme discount, SMCI has a forward P/E ratio of 9.05x, -a 61.12% difference to the sector and an A+ forward PEG ratio -of 77.72%. With strong growth and a push toward IT services, SMCI is focused on differentiating itself while continuing to design and manufacture its hardware in the U.S. to maintain a competitive advance amidst supply chain disruptions that affect other tech companies with facilities abroad.

SMCI posted stellar Q4 EPS of $2.62, which beat by $0.27, and revenue of $1.64B that beat by $30.53M, a record total of $5.2B in year-over-year revenue above guidance. Strong, consistent EPS over the last several quarters has resulted in an A+ revisions grade and four analysts’ FY1 Up revisions within the last 90 days. Given the company’s robust growth in the US this year, especially in its all-in-one rack solutions, SMCI’s goal is to become a global leader in rack scale and play IT solutions, expanding solutions throughout Europe and Asia. SMCI is on a mission to rank among the leaders of their specialized industry. Along with my four other stock picks with strong buy recommendations, I hope investors can find stocks that meet the quant-rated investment criteria to benefit them from a recession rebound.

Strong Stock Picks Fare Better During Recessions

Negative sentiment surrounding monetary policy, inflation, and recession uncertainties have contributed to this year’s market declines. But we’re seeing a turnaround following July CPI of 8.5%, indicating inflation may be cooling. Uncertainty is still moving the markets, and whether the recent rallies result from a bull rally or bear market rallies remains to be seen. Tighter monetary and fiscal policies and geopolitical issues around the globe have resulted in declines in the major U.S. indexes, as illustrated below, leading to crushing blows to the percentage of stocks above their 200-day moving average.

As investors look to the future and the Fed works to tame inflation, consider our top five tech stocks for a recession rebound, DQ, PLAB, SPLK, CALX, and SMCI. These recommendations possess more robust fundamentals than some of the beaten-down tech stocks driving the Nasdaq and S&P 500. This means they have better growth rates and much better valuation frameworks. In fact, each of the recommended stocks possesses solid growth and profitability metrics, rising earnings revisions, and strong fundamental tailwinds. Our investment research tools help to ensure you are furnished with the best resources to make informed investment decisions. We appreciate you as a member and hope you find value in creating Stock Screens to suit your specific investment objectives.