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Despite Drop, Tech Stocks Remain Market's Best Bet

Technology stocks have hit a snag since peaking in late March.

Strategists say any pullback now is merely a buying opportunity.

Despite earnings disappointments and some wobbling by Apple, technology stocks remain the market's bedrock and likely safety valve should a summer swoon hit.

NASDAQ
NASDAQ

Tech led the stock marketlower Wednesday as investors recoiled over earnings from Intel that, while beating profit estimates, fell short in gross margins outlook.

The damage spread across the sector's biggest names, with IBM tumbling and Apple , which has come off its lofty pedestal, continuing to show inclination to give back the meteoric gainsit had seen since November.

But taken on balance, the group's strong cash position, innovation potential and expected growth mean it likely will remain a favorite for many investors.

After all, the earnings season, though still young, has has seen about 80 percent of companies in the space beat expectations, according to Mary Ann Bartels, technical research analyst at Bank of America Merrill Lynch.

"That's a big number during earnings season," Bartels said in an interview. "You're always going to have select disappointments. But as long as the aggregate is strong — in fact, it's been doing better than last quarter — that doesn't concern me."

Tech stocks have led the market rally a fairly large margin.

The Nasdaq 100 , which is composed mostly of companies in the sector, has roared ahead 16 percent in 2012. On the Standard & Poor's 500 , information technology has gained just over 20 percent, making it the strongest of the index's 10 sectors.

With the Nasdaq pulling back nearly 3 percent over the past three weeks, Bartels believes now is a good time to jump in.

"A pullback to the 2,800 or 2,900 area would just be a test of the breakout," she says. "We're looking to get a dip and get back in. We're definitely of the mentality that investors should be buying aggressively on the pullback in technology and the Nasdaq."

Intel slid Wednesday primarily because traders didn't like the quality of its earnings beat. Company officials warned that its gross profit margin would decline in the second quarter due to costs associated with a new production process.

But Craig Berger, semiconductor analyst at FBR Capital Markets, said Intel can be trusted to do its best to help shareholder value.

"It's not a big problem, it's a small problem," Berger said, during a CNBC "Squawk Box" interview, regarding the margins issue. "The company's bought back a ton of stock over the last four to six quarters. They keep buying back, so they have a lot less net cash on the balance sheet because they reduced 20 percent of the outstanding share count. So that's really helped" the stock price.

Still, Berger said investors looking for a mega-cap company in the chip space might do better with Qualcomm than Intel. One of Intel's main challenge to improve its margins will be to get smartphone makers Apple and Samsung to buy its processors, Michael McConnell, an analyst at Pacific Crest, told CNBC's "Squawk on the Street."

But while Intel was disappointing the market, Yahoo's earnings Tuesday had the opposite effect, with a modest growth in revenue cheering traders, who sent the company's stock to a solid gain Wednesday despite the broader market weakness.

Yahoo officials told analysts in a conference call that a potential buyback of its stake in China's Alibaba Group Internet company was progressing.

"We see potential positive catalysts related to better focus and execution from new management, new offerings, and the Alibaba Group investment," S&P Capital IQ analyst Scott Kessler said in a note in which he raised his full-year earnings target for Yahoo from 90 cents to 95 cents a share.

To be sure, tech stocks do present some challenges.

Price-to-earnings multiples in some cases are stretched, particularly among start-ups, and a blip in the space could cause market havoc. Apple, Microsoft and IBM alone comprise 8.3 percent of the entire S&P 500's market cap, so they have outsized influence in the way the widely followed index moves.

But Bartels, at BofA, says chart analysis shows the group strong from an advance-decline perspective, and others tout corporate liquidity that will keep tech strong. There's also that Facebook initial public offeringin May to pique investor interest.

"Techs are going to continue to attract money," says Keith Springer, president of Springer Financial Advisory in Sacramento, Calif. "It's institutional money first, then the individuals tend to follow. Tech has been one of the leaders in this market rally for three years. But even trees don't grow straight to the key. You've got to give them a chance to pull back a little."

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