logo

These trade war-proof stocks could be your best hedge against a tech sell-off

VIDEO4:2204:22
These tech stocks could provide shelter from sector sell-off

In this tough market, software could be your best bet, according to two market watchers.

While the broader tech sector has declined by nearly 8% month to date, under pressure from worries around U.S.-China trade negotiations, the software sector has held up better, notching about a 6% loss.

Experts like Mark Tepper, president and CEO of Strategic Wealth Partners, attribute this to the power of the perpetually growing software industry as well as its exclusion from a key market: China.

"We're right in the middle of this slow-growth economy right now, and businesses are trying to do anything they can to gain an edge," Tepper said Tuesday on CNBC's "Trading Nation." "Every company wants to be as efficient as possible, as profitable as possible, and there are software companies that help them to do that. Beyond that, a lot of tech is exposed to the trade war, but not software."

As such, investors seeking "growth without the trade war headwinds" may have few better options than stocks within the software sector, Tepper said, pointing to two names he owns and recommends: cybersecurity provider Palo Alto Networks and multimedia giant Adobe.

"We just recently bought Palo Alto Networks, and cybersecurity is a secular theme that we want to be a part of," Tepper said. "They're the leading firewall provider, and ... all the heavy lifting surrounding their shift over to subscription-based revenues is now behind them. And right now, you can pick them up at an incredibly attractive valuation."

Adobe also has the advantage of profiting from subscriptions, including to its Creative Cloud digital media suite and its digital marketing arm, "which is where all the advertising business is headed right now," Tepper said.

"Over the last four years, they've gone from 50% recurring [revenues] all the way up to 88% recurring. And over the course of that time, their profit margins have nearly tripled as a result, and they've got no exposure to China," he said. "So, software companies are less exposed to the trade war, but a lot of them have pulled back, and we're backing up the truck and buying them while they're on sale."

Backing up the truck doesn't sound like a bad idea to Oppenheimer's Ari Wald, the firm's chief market technician. Software, he said, has been one of his team's "long-standing recommendations" due to its technical resilience.

"The outperformance within software has really been correlated to the yield curve. As the yield curve has flattened, software has outperformed," he said. "And our macro focus is on low growth rather than no growth, and I think a premium continues to get placed on these higher-growth companies in this low-growth world."

Better yet, software has been performing well vis-a-vis Oppenheimer's momentum scores, which have found that the top outperformers from a given year tend to outperform the following year as well.

"When you add it all up, we think [software is] a group that continues to work," Wald said in the same "Trading Nation" interview. "Here's a group of the market that's already at new highs. It's already broken through September resistance. The market hasn't been able to do that. I think that's telling."

For his single-stock recommendation, Wald opted for Microsoft, the largest name in the iShares Expanded Tech-Software Sector ETF, which tracks the software subsector.

"Here's a stock that's getting through multidecade resistance versus what's been a relatively strong technology sector," he said, calling Microsoft "a leader among leaders."

"We think those trends continue," Wald said.

Software shed nearly 1% in early Wednesday trading. The subsector has climbed nearly 21% year to date.

Disclosure: Strategic Wealth Partners owns shares of Palo Alto Networks and Adobe.