As goes tech, so goes the S&P 500 Index.
I’ve been saying it all year, and the past few weeks have proved it.
AI infrastructure trades dominate this market. So when tech stumbles, the broader market stumbles with it. As longtime readers know, I’ve never been interested in buying “the market.” My Green Zone Power Ratings system is designed to identify individual stocks positioned to outperform.
So, where does that leave us with tech?
The megacap names dominating the headlines are struggling right now, but might there be some hidden gems?
You bet there are. I’ll show you where in a moment.
First, let’s talk about the elephant in the room…
Today, America votes.
These midterms are shaping up to be a referendum on voters’ frustrations: sticky inflation, high gas prices and data centers popping up in seemingly every backyard.
My Green Zone Power Ratings won’t tell you which party wins the election tonight or by what margin. I’ll defer to the betting markets or polls for that. And right now, they’re pointing to a blue wave, with Democrats taking both the House and the Senate.
What would that mean for the AI boom and the stock market?
Probably not much.
Yes, Democrats have been more skeptical of AI and more open to regulating it. But Congress moves slowly. And in the unlikely event it passes an AI bill in the next two years, President Donald Trump still has his veto pen. It won’t be politics that makes or breaks the bull market, at least not directly. Ultimately, it will be earnings that determine the direction stocks take… which is impacted by Big Tech’s ability to finance its AI buildout… which, in turn, is affected by interest rates and inflation.
That’s a lot of moving parts. It’s exactly where my Green Zone Power Ratings help cut through the noise…
- Quality tells us how much debt a company is carrying, and whether that debt is turning into higher returns on equity and assets.
- Growth tells us how quickly all that AI spending is showing up in revenue and earnings.
- Value tells us what price we’re paying for that growth.
With that in mind, let’s dig into the tech sector.
We know tech is struggling. Run it through my Green Zone Power Ratings, and it’s easy to see why.
Of the 79 stocks we analyzed, only 13 rated as “Bullish,” meaning a score of 60 or higher out of 100. (For those new to my system, “Bullish”-rated stocks outperform the S&P 500 Index by double on average over the following year.)
Another 32 stocks are rated as “Neutral,” meaning my system would expect them to perform more or less in line with the broader market.
And 30 rate as “Bearish,” meaning my system would expect them to significantly underperform the market.
Overall, this sector is priced to underperform the market going forward.
Where Does Tech Pick Up Points?
The Green Zone Power Ratings system is a composite score based on six primary factors: momentum, size, volatility, value, quality and growth, each of which comprises several sub-factors. (As we are looking at large-cap constituents of the S&P 500, I don’t consider size when doing the sector X-ray.)
So, where do tech stocks pick up the most points?
We know that the hyperscalers like Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL) and Meta Platforms (META) are borrowing heavily to build out data centers.
All else equal, this will lower their quality factors over time, as high debt levels and “asset heaviness” pull down the score.
It’s also important to keep in mind that, with the exception of Microsoft, none of these companies is a “tech stock,” per se. Amazon is classified as consumer discretionary, and Alphabet and Meta are in the communications sector.
I say this because, even with the AI borrowing spree underway, the tech sector rates amazingly well on its quality factor. 67 out of 79 stocks rate as “Bullish.”
The sector rates particularly strongly on growth too, with 55 out of 79 rating as “Bullish.”
Finding Hidden Gems
Rather than go over the same large-cap tech names for the umpteenth time, I decided to do things a little differently today. I broadened my criteria beyond the S&P 500 to include smaller and non-U.S. tech stocks.
Here are the highest-rated of the lot, each with an overall rating over 90:
These may be “technology stocks,” strictly speaking, but they tend to be pretty low-tech.
For example, the two top-rated stocks with perfect 100 scores are Brother Industries (BRTHY), the Japanese maker of desktop printers, and EACO Corp (EACO), a maker of electronic components and fasteners. And nipping at their heels, in third place, is another old-school Japanese printer company, Ricoh (RICOY).
Each of these rates as “Bullish” or “Strong Bullish” across all five factors. And all rate exceptionally well on momentum, which tells us that Wall Street is piling in.
Before I go, I’d like to direct your attention to the identity verifier Red Violet (RDVT). My 10X Stocks readers will no doubt recognize it.
I recommended the shares about two years ago and recommended we sell half the position once it was up 100%.
We’re now up 159% on the remaining half… and if the high Green Zone rating is any indication, we’re just getting started.
To good profits,
Adam O’Dell
Editor, What My System Says Today
