Technology has a growth problem. It sounds odd, but it makes sense if you think about it. Cyclical businesses in fields like energy, industrials and basic materials caught in the doldrums during the pandemic are now seeing a Phoenix-like reversal of fortunes.

In contrast, sales and profits of many technologies have held up well during the pandemic. So the updraft they’re getting from a recovering economy seems kind of ho-hum, relatively speaking.

“Due to COVID, many tech companies have experienced strong growth,” said Vlad Rom, senior investment analyst at Thrivent, a Minnesota-based fund manager. He noted that the pandemic has driven technology spending forward as businesses seek new ways to reach consumers and hold meetings.

“This was not the case for non-tech companies,” he says. Today, as the economy recovers, these non-tech companies are experiencing a strong rebound in growth. “A tech company that grew 30% last year will grow 30% this year. A non-tech company with zero growth last year will grow 50% this year. This is what many investors focus on. “

In other words, this is the cyclical trading you’ve heard so much about. “The gradual shift to a more cyclical business looks better,” said Joseph Chin, analyst at Cambiar Investors in Denver.

Another problem is that emerging tech companies – think of recent initial public offerings – expect big profits in terms of profits in the distant future. They are therefore hit hard when investors fear that rapid inflation will push up interest rates. This reduces the present value of future profits in valuation models.

In short, technology is no longer in vogue, which makes it a place to shop for nonconformists like me. Indeed, technology has already rebounded in the last few trading days. The Nasdaq Composite lost 8.5% from peak to trough during its recent pullback. As the S&P 500 Index and the Dow Jones Industrial Average flirt with all-time highs, the Nasdaq is still over 3%.

“Big tech looks very attractive today, especially given the recent underperformance,” said Todd Lowenstein, chief equity strategist at HighMark Capital Management. “This is a unique opportunity to upgrade your portfolio to quality in big tech, this is where one of the best stocks on the market today is. “

Here are five reasons why.

1. Insiders buy

For my letter on stocks (Brush Up on Stocks, link in bio below), I have been following insiders daily for over a decade, and one thing is always clear: Insider buying in companies technologies are extremely rare. But that has changed in recent weeks – resulting in an unusually high volume of tech insider buying.

I just published for the first time an issue of my newsletter that focused only on technology and featured 10 very attractive names. I highlighted several others in my letter earlier this month. I identify a few below. Bottom line: Widespread insider interest tells me that technology is a buy.

2. The “growth problem” of technology will disappear

The pandemic has advanced the adoption of technology among businesses. This makes year-to-year technology comparisons difficult as we move into 2021, says Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “But as we move into 2022, we think the streets are underestimating the growth of technology relative to the overall market. We would opportunistically review the technology over the next couple of months. “

3. The technology seems reasonably priced

The chart below shows the relative value of technology stocks in the S&P 500 versus the valuation of the S&P 500 itself. As you can see, the technology’s price / earnings ratio has recently traded at its average of 1.24 times the comp’s price / earnings multiple.

© Leuthold

4. Technology has an advantage when labor costs increase

While businesses in retail, restaurants, hotels, and other service industries will experience an impact on their margins due to rising labor costs, tech companies typically don’t have this. problem. They employ relatively fewer people.

“Technology is perhaps the best way to deal with the uncertainty surrounding labor costs,” says James Paulsen, chief investment strategist at Leuthold Group. “Historically, the relative performance of investments in this sector has been largely unchanged in the face of such pressures. “

5. Fears about interest rates and inflation are exaggerated

Ironically, tech companies will come to the rescue – and literally save their own stocks. Why? Capital spending has increased significantly over the past year. This tells us that productivity will continue to increase. This allows companies to avoid passing on higher labor costs to consumers in the form of price increases.

“The long-term growth of this economy will have to be driven by productivity growth, and technology will be the key to creating that productivity,” Miskin said.

What to buy

Arms traffickers in crisps

Chip and chipmaking companies seem undervalued, says Chin at Cambiar Investors, and he singles out Applied Materials It’s worth listening to because his shop owns shares in its Cambiar Opportunity Fund The fund outperforms its category of large-cap value and the Russell 1000 Value Index by nearly 5 percentage points annualized over the past three years, according to Morningstar.

Chin cites four reasons for favoring Applied Materials: the continuing shortage of chips; relocation of chip manufacturing to the United States; the demand for trends such as autonomous vehicles, artificial intelligence and data analytics; and competition among chipmakers to improve chip computing power. “We believe Applied Materials and the industry are entering a period of much higher growth,” he says.

“It will take another four to six quarters for supply to catch up with demand and inventory,” said Harlan Sur, an analyst at JP Morgan, which is overweight Applied Materials, KLA and Lam Research in chip-based equipment, and several of the big chips. manufacturers such as NVIDIA and Microchip Technology

Names that insiders prefer

Over the past few weeks, I’ve suggested Microsoft Intel and Snowflake in my newsletter a bit below current prices, in part because of the enticing insider buying, and I still love those names.

At the start of major economic rebounds, investors flock to growth, regardless of the quality of the companies. But as we move into the middle of the cycle, investors favor quality tech names, Lowenstein says, characterized by high margins, stable earnings growth and strong balance sheets.

“If you are looking for quality, it will lead you to technology,” says Lowenstein.

This will favor Microsoft in cloud computing and software. Microsoft doesn’t look cheap, but the premium valuation is justified because of its rapid growth, says Mark Murphy, analyst at JP Morgan.

Intel stocks have been held back by manufacturing issues, but right now the stock looks relatively cheap relative to the market with its price-to-earnings ratio of around 12, says Hendi Susanto, portfolio manager and analyst technology at Gabelli Funds. “Intel is fixing the problem,” says Susanto.

Intel will also benefit from high demand for chips and a shortage of chips. “The industry is only 30-40% in the current bull cycle,” says Sur, at JP Morgan.

Snowflake is all about the data. This is his mission. The company offers a product called Data Cloud that helps customers share, explore and unlock the value of data. Much of the talk here is that Snowflake helps customers break down data silos within various pieces of hardware, applications, networks, and clouds. BlackRock and MasterCard agree. They are clients among dozens of other Fortune 500 companies.

Security software companies

The recent Colonial Pipeline ransomware attack that caused widespread fuel shortages on the East Coast has reminded all of us of the continued need for better security software.

Gabelli’s Susanto favors firewall company Check Point Software Technologies, citing cheap valuation, high operating margins and the prevalence of recurring revenue. Check Point is trading at around 22 times earnings, compared to over 60 for security software company Palo Alto Networks

RBC Capital Markets analyst Matthew Hedberg is overweight Palo Alto, citing in part the Colonial Pipeline ransomware attack, as well as the “Sunburst” hack affecting businesses and governments last December and the attack of Microsoft Exchange Server malware in March.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned SNOW. Brush suggested NVDA, MCHP, MSFT, INTC, SNOW, BLK, MA and PANW in his stock newsletter, Refresh actions. Follow him on twitter @mbrushstocks.

Now read: Amazon and Facebook as defensive games? Yeah, with these other stocks that are cash flow winners