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How to play tech in the face of new bearish calls

Key Points
  • Tech is up 28% in 2019 — but Bernstein warns that tech companies, especially high priced stocks, may be getting too expensive as earnings expectations are starting to decline.
  • Apple fell 2% and Juniper 4% on Monday after being downgraded to 'sell' ratings, as the Dow slid more than 100 points.
  • But don't just look at inexpensive value tech stocks, said Adam Parker of Trivariate Capital Management LP on Monday's "Halftime Report." He and Ritholtz Wealth Management's Josh Brown believe the action in tech is in software as a service, enterprise, and cloud.

Rising risks in tech?

Tech is the best performing sector of the year — up 28% so far in 2019 — and is outperforming the S&P 500 by about 7 percentage points, but a number of Wall Street firms are signaling caution.

Bernstein analyst Toni Sacconaghi warned in a research note Monday that tech stocks may be getting too expensive relative to earnings estimates that are now expected to decline. According to Bernstein, valuations for the high-flying sector hit their highest level in 15 years but earnings are expected to drop by 9.9 percentage points over the next year. Because of his concerns, Sacconaghi encourages investors to favor "inexpensive/value tech stocks versus expensive/growth stocks."

Separately on Monday, Rosenblatt Securities downgraded Apple to sell from neutral with a price target of $150 on the belief that new iPhone sales will disappoint, wearables won't deliver enough growth, and fundamentals will deteriorate over the next year. Citigroup also downgraded Juniper Networks to sell from neutral, citing overly lofty expectations for the second half of the year. Apple fell 2% and Juniper fell 4% following those downgrades, as the Dow slid over 100 points in Monday's session.

Apple CEO Tim Cook
Dow falls more than 100 points as Apple leads tech slide, Wall Street awaits Powell testimony

But on Monday's "Halftime Report," the traders expressed disagreement with these bearish calls on tech.

"I think there are a few stocks that are valued too high here [in tech]. But I think there are opportunities," said Shannon Saccocia, Chief Investment Officer at Boston Private. "If you're looking for a potential place to play in a binary/cyclical play, semis are a good place to do it." The semiconductors have indeed been tied to the trade news, with the group most recently rallying after Presidents Trump and Xi's agreement to reopen negotiations in the U.S.-China trade dispute.

Like Saccocia, Adam Parker of Trivariate Capital Management LP doesn't think the call to buy value tech stocks is necessarily accurate. "Value tech works when you have accelerating revenue or expanding margins. If you don't have that, [you shouldn't buy] just because it's cheap; it's cheap for a reason," Parker said.

As for the Apple downgrade, Joe Terranova of Virtus Investment Partners, one of the few traders on the "Halftime Report" desk who doesn't own the stock, remains on the sidelines and is waiting for more information from the fiscal Q3 earnings. He said, "They cut revenue outlook for the first time in two decades in January. The market responded negatively. The other side of that was quickly reversed… Apple stock has recovered. Now you're waiting until July 30 to see what earnings are going to look like."

Final trades: JPMorgan, Alaska Airlines, Goldman Sachs & Synopsys

Cerity Partners' Jim Lebenthal was more dismissive of the Juniper downgrade because of the long term upside potential he sees in the development of 5G networks, a story that will play out in the tech and telecom spaces. "You've got to differentiate between the short term and the long term. Short term, that might be the call… But in the long run these guys are going to be playing in 5G. That's a long term trend that's going to play out over the next 2-3 years. I think this is a 'buy the dip' sort of call."

Where else in tech should investors look? "All of the action in tech is in software as a service, enterprise, [and] cloud," Josh Brown, CEO of Ritholtz Wealth Management, says.

Software as a service (SAAS) companies allow customers access to software in the cloud, usually through a subscription model, rather than selling software that customers would install on their computers. Borrowing similar language, Parker agreed, "As a whole I like the software stuff and the growth stuff, where the action is."

Disclosure: Josh Brown, Jim Lebenthal, and Shannon Saccocia own shares of Apple.