By Jacob Sonenshine
Stocks in the technology sector look cheap, but some are more attractive than others.
Pick wisely in software, especially. Avoiding the cheapest software names and buying the more expensive ones makes sense right now. Don't worry: the expensive ones are still cheaper than they were before the tech decline began.
Trivariate Research's Adam Parker writes that investors should "avoid cheap and slow growing stocks within the industry -- they are likely a value trap." He advises investors to consider the more expensive ones.
The backdrop is that the State Street Technology Select Sector SPDR Exchange-Traded Fund is down just over 14% from its late October record high, worse than the S&P 500's 8% fall.
Helping drive the sector down is the fear that privately held artificial intelligence pioneers Anthropic and OpenAI will upend many companies offering business-to-business software products. Meanwhile, semiconductor stocks have dropped as traders take profits after years of strong performance.
This leaves the tech ETF trading at 19.4 times aggregate earnings analysts expect for the coming 12 months. That's below the S&P 500's 19.9 times. This is extremely rare; tech usually trades expensively versus the market because of its higher expected earnings growth and high quality. The mega market capitalization tech companies have massive balance sheets and little debt in aggregate.
So a prudent investor can buy the tech fund now -- or purchase a handful of individual names that look ready to drive the sector higher.
The issue is that returns could end up dispersed, meaning one stock could crater and another could rebound spectacularly. So owning the right ones would result in massive gains -- much larger than potential gains for the sector as a whole.
Cybersecurity stocks Palo Alto Networks, CrowdStrike, and Cloudflare all trade at some of the highest P/E multiples in software (they're still cheaper versus their peaks), and they're all up a touch in the past month. Meanwhile, Adobe, Salesforce, and its competitor HubSpot, all trade at some of the lowest P/E's in software, and have all seen their stocks drop in the past month. The strategy here would be to buy the former three, the cybersecurity providers, and avoid the latter three.
The reason for the divergence between the cheap and expensive ones: the cheap ones provide sales and marketing software services that Anthropic's Claude and OpenAi's ChatGPT are already starting to provide. Meanwhile, the expensive names provide complex cybersecurity software for large organizations, a service that is far more difficult for the two large private AI companies to replicate. For those three cyber companies, analysts forecast about 20% earnings annual growth over the coming two years on average, according to FactSet, better than the roughly 15% on average for the three cheaper, non-cyber names.
Elsewhere in software, look at Twilio, our recent stock pick. It's down only 15% from its record high, while the iShares Expanded Tech-Software Sector Exchange-Traded Fund is down 34% from its peak. Twilio has also dropped less than the software fund in the past month.
It provides an application programming interface that helps businesses communicate across software platforms, allowing them to transfer data and coordinate different data sets. It's a very niche product that businesses across the globe need in order to operate every day, a need the AI pioneers haven't addressed.
In semiconductors, Parker calls memory stocks' recent trading "worrisome."
While they're already down from peaks, they're still at dangerously high levels. Micron Technology, for instance, is still up almost 270% in the last five years on the back of unending demand for memory as companies build out their AI data centers. The problem is that good news isn't moving these names much higher because of "growing concerns about eventual excess capacity," Parker notes. Micron's blowout earnings release in late March couldn't keep the stock from tumbling afterward.
Other makers of memory products that have seen their stocks soar in recent years, and that investors can avoid: Western Digital, Sandisk, Teradyne, and Advantest.
The chip makers to pick up are Nvidia, Advanced Micro Devices and Broadcom, which analysts at our late March roundtable pitched. These three provide AI chips for data centers and are still expected to grow for years to come. They all trade between 19 and 25 times earnings, whereas they often trade at more than 10 points above the S&P 500.
Tech stocks look interesting -- but be choosy about which to buy.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 30, 2026 14:07 ET (18:07 GMT)
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