With the economy slowing and oil prices down by about 20% over the last couple of weeks, odds are increasing that inflation could be turning lower. This could be a catalyst for high-quality tech stocks such as Microsoft (MSFT), Veeva (VEEV), and Expedia (EXPE).
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Over the past month, there has been a major change in the market under the surface. In essence, inflation risk is dropping, while recession risk is increasing.
This has major implications for investors, especially as this looks to be a meaningful trend that could persist for many months. Although we’ve yet to see a major impact in terms of earnings and employment, it’s increasingly clear that the economy is slowing which is being exacerbated by the Fed’s hawkish stance.
This slowing is inevitably going to affect inflation. Leading indicators are showing a dramatic drop in transportation costs, while retailers are cutting prices in order to move inventory off shelves. The one component that continued to move higher – food and energy – has also turned lower and in some cases, is below their pre-invasion levels.
Prior to these latest developments, we had an economy with low recession risk and rising inflation risk. This led to outperformance for cyclical stocks, while growth and tech languished. Now, we should expect growth and tech stocks to outperform amid these circumstances. Below are 3 tech stocks that investors should consider buying on weakness:
Veeva Systems (VEEV)
VEEV is at the intersection of several, bullish booming trends. These include enterprise software, cloud computing, healthcare, and pharmaceuticals.
The healthcare sector’s growth is fueled by demographics due to an aging population in developed countries all over the world, increased government spending, and the constant stream of innovations that lead to new treatments. Healthcare spending as a share of GDP has risen to 18% in 2020, from under 12% in 1990.
However, VEEV is actually a software and cloud computing company which come with more growth and higher margins. Unlike many stocks in the software and cloud space, there are high barriers to entry which means limited competition. For investors, it translates into a deep and wide moat, and leads to high rates of recurring revenue.
From peak to trough, VEEV’s stock price declined by 56%. Yet, the earnings outlook remains solid as evidenced by its latest report which showed the company beating on the top and bottom-line and issuing better than expected guidance.
Given these positives, it’s not surprising that VEEV has an overall B rating, which translates to a Buy in our POWR Ratings system. It also has an A for Quality as it’s one of the leading stocks in a large total addressable market with only a handful of competitors.
VEEV also has a B for growth makes sense given its double-digit earnings and revenue growth and positioning at the intersection of two large and growing markets – healthcare and cloud computing. Click here to see more of VEEV’s POWR Ratings including grades for Value, Momentum, and Stability.
Expedia (EXPE)
EXPE is one of the largest online booking companies in the world. It operates through multiple segments including Expedia, Vrbo, Hotels.com, Orbitz, Travelocity, and Wotif. In addition, it offers a range of travel and non-travel verticals, including for corporate travel management, airlines, travel agents, online retailers, and financial institutions.
Like many travel stocks, EXPE is seeing a huge surge in revenues and bookings due to people’s pent-up demand for travel. However, the stock price has languished due to the market’s concern of a slowdown and potential recession.
Thus, EXPE’s stock is down 57% from its all-time high in Februay of this year. Despite this, the stock’s earnings outlook remains strong. This year, analysts expect the company to earn $7 per share which will climb to $9 per share in 2023.
This combination fo growth and value makes the stock quite attractive. It’s a major reason why EXPE is rated a B which equates to a Buy rating. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s average annual 8.0% gain.
Click here to see EXPE’s complete POWR Ratings.
Microsoft (MSFT)
MSFT needs no introduction given its dominance in multiple categories such as PC software, enterprise software, and cloud computing. It’s also the best-performing stock in the S&P 500 over the last decade.
However, the stock did suffer a pullback amid the selloff in the market and rise in rates. As inflation expectations decline, we are seeing longer-term rates pull back. This is a positive catalyst for stocks like MSFT.
One reason is Microsoft’s fortress of a balance sheet which means it’s insulated from economic weakness. Further, its dividends become more attractive in a lower-rate environment, and share buybacks become more attractive.
Although, Microsoft’s dividend is quite modest at just over 1%, it is one of the leaders in terms of dividend growth. Over the last 3 years, it’s increased its payout by more than 10%. And, the payout has increased by 259% over the last decade. This is also in addition to hefty buybacks.
Many stocks with attractive dividends and a strong balance sheet are lacking when it comes to earnings and revenue growth. Not so in MSFT’s case which continues to see double-digit earnings growth in 2022.
MSFT’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The stock has a B for Quality due to its leadership in many large markets and a track record of growth and execution. It also has a B for Sentiment as 22 out of 23 analysts covering the stock have a Buy rating with a consensus price target of $363, implying a 31% upside. Click here to see the complete POWR ratings for MSFT.
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MSFT shares were unchanged in after-hours trading Friday. Year-to-date, MSFT has declined -20.05%, versus a -17.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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