Investors may be tempted to steer clear of tech stocks after recent steep losses, but that weakness hasn’t shaken Deutsche Bank’s confidence in the sector.
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On July 26, the tech-heavy Nasdaq Composite dropped more than 1 percent as Facebook posted its worst day ever. One day later, the index dropped 1.46 percent, with shares of Intel and Twitter leading declines.
“Following recent weakness in social media and other tech related names, there has been increased rhetoric surrounding the ‘demise of Tech’ and the suggestion that tech has lost its market leadership position. In short, we believe this rhetoric is premature,” Larry Adam, chief investment officer of Deutsche Bank’s Wealth Management Americas unit, wrote in an August 3 note.
The German bank acknowledged that 18 percent of the S&P 500 information technology sector and 43 percent of Nasdaq companies are down more than 20 percent from their year-to-date highs. But it also pointed out that the S&P 500 IT sector is still 28 percent higher over the past year, and it’s the top performer in the index over that period.
Despite the stumbles, Deutsche Bank said tech shares are still great for investors because of solid earnings, cheaper projected valuations, and expected higher dividend payouts, among other factors.
Tech companies have had record cash flows, and that has led to a number of “supportive shareholder friendly” actions: buybacks of $66 billion in the second quarter of 2018, and expected dividends of 11 percent in 2018 and 9 percent in 2019, Adam wrote.
Tech firms’ earnings have also remained “robust,” Adam added, with the sector posting earnings growth of 33.5 percent, and over 90 percent of companies beating earnings estimates.
Going forward, Adam said, tech results should still be strong, with full year earnings expected to go up by about 20 percent in 2018 and 11 percent in 2019.
Valuations in the sector are expected to become cheaper, the Deutsche note said, which mean the stocks might be more attractive to investors.
Finally, the strong growth in the U.S. economy is bound to benefit American information technology companies, which will enjoy strong consumer demand and a surge in business spending, Adam said.