These stocks look attractive in a beaten-down tech sector, analysts say

Published Wed, Apr 20 20229:02 PM EDT

The tide is turning for tech stocks, according to some analysts, who reveal their top picks in a sector they say could be about to outperform. After years of market-beating returns, tech stocks have nosedived amid a sharp spike in market volatility. The sector has also borne the brunt of a market rotation out of growth and into value names. The impact of a widely anticipated steep rate hiking cycle has also weighed on the group, since it makes growth stocks' future earnings less attractive. The tech-heavy Nasdaq is down more than 13% this year, and tech stocks were among the first-quarter's worst performers. But the worst could be behind the sector now, according to UBS , which upgraded the sector to overweight in a note last week. "Tech upgrade is supported by improving relative growth/momentum, higher quality, strong pricing power, lower cost exposures and payout potential. Valuation and higher rates are overhangs but growth/cycle should matter more," UBS' analysts, led by Keith Parker, said in a note last week. The Swiss bank noted that the sector's earnings and sales growth outlook for the next 12 months have recovered from recent lows and are both now above the S & P 500's levels. "As the market worries more about recession risks, an improving relative growth profile for Tech should support Tech outperformance - as is typical at this stage of the cycle," Parker said. He likes software as the "most attractive" industry, pointing to surging labor costs that he said will support productivity-related IT and software spending. While the software sub-sector has underperformed the S & P 500 by 10% over the last six months, Parker believes it could outperform, supported by strong forward earnings and sales growth relative to the S & P 500. Undervalued tech stocks Financial services firm Morningstar also thinks the software sector looks the "most attractive," as it advised investors to gravitate toward high-quality, wide-moat software companies. Its top picks in this space include Salesforce and Adobe . The tech sector is now "close to fair value," after having recovered the most since the market trough in mid-March, Morningstar's Chief U.S Strategist Dave Sekera said in a note on Apr. 1. But Sekera stopped short of saying the worst is over for the sector. "As long-term investors, we do not try to call market bottoms, but highlight where we see undervalued opportunities and warn when stocks appear to become overvalued," Sekera told CNBC. He expects volatility to remain high within the sector, with trading activity to "be highly idiosyncratic." "I expect that companies with strong pricing power, who maintain earnings guidance, and have resolved supply chain issues will trade well as valuations have come down this year," Sekera added. Outside of software, he also likes chipmaker Intel , cyber authentication firm Okta and DocuSign . Read more Goldman says buy these tech stocks to beat the turbulence — and gives one 80% upside Fund manager names 3 'must own' tech stocks — and explains why he is keeping an eye on Meta Pillar of strength Against the backdrop of a volatile market, Wedbush's Dan Ives prefers "more defensive" tech names. "Cyber security is a pillar of strength in this choppy market as we believe this sub-sector is seeing robust growth and should have a homerun earnings season," Wedbush's Dan Ives told CNBC. "The threats facing companies on the cyber security front are not going away, which speaks to why cyber is a defensive tech sector that should outperform," he added. His top picks in this space are Palo Alto , Check Point , Tenable , Crowdstrike and Zscaler . Outside of the cyber security space, Ives likes large-cap software picks that are more defensive in this "jittery market," such as Microsoft and Oracle . He also likes Adobe, and Salesforce — two stocks who made Morningstar's list as well.

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The tide is turning for tech stocks, according to some analysts, who reveal their top picks in a sector they say could be about to outperform.