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Nasdaq Composite Exits Bear Market: 5 Picks to Tap the Bull

U.S. stocks markets have been witnessing an impressive northbound journey since mid-June after completing a pathetic first half of 2022. Of the various sectors in the economy, technology suffered the most in this period. Interestingly of the three major indexes, the tech-heavy Nasdaq Composite has rallied the most since mid-June.

We believe the market rally will continue in the near future as most of the negatives, such as mounting inflation, a higher interest rate and tighter monetary control are already factored in the market’s valuation. Moreover, better-than-expected second-quarter earnings results and stable fundamentals of the U.S. economy will likely provide the necessary impetus for the rally to sustain.

At this stage, it should be prudent to invest in the Nasdaq Composite listed technology giants with a favorable Zacks Rank to gain in the near term. Here are five such stocks — Cadence Design Systems Inc. CDNS, Intuit Inc. INTU, Texas Instruments Inc. TXN, Palo Alto Networks Inc. PANW and Fortinet Inc. FTNT.

Nasdaq Composite Exits Bear Market

In the last two coronavirus-ridden years, the Nasdaq Composite recorded an astonishing rally of more than 140%. The tech-heavy index recorded its all-time high of 16212.23 on Nov 22, 2021.

The meteoric rise of the technology stocks was the sole reason for this impressive rally. Therefore, Wall Street started 2022 with a highly overvalued tech sector. Consequently, investors started profit booking in this sector.

Moreover, mounting inflation compelled the Fed to significantly raise the benchmark interest rate from March this year. The central bank also imposed tougher monetary control sucking liquidity from the economy and raising the market’s risk-free returns.

A higher interest rate is detrimental to growth sectors like technology. Consequently, the tech-laden Nasdaq Composite entered bear market on Mar 7, 2022 after declining more than 20% from its recent high recorded on Nov 22.
After entering the bear market, the Nasdaq Composite registered its recent low of 10,565.14 on Jun 16. Thereafter, the tech-laden index saw a sharp rebound along with two other major stock indexes — the Dow and the S&P 500.

Finally, on Aug 4, the Nasdaq Composite exited the bear market after rallying more than 20% from its recent low. Year to date, the index is down 17.1%. However, from Jun 16 low to Aug 18, the Nasdaq Composite has jumped 22.7%.

Technology is the Best Bet for Recovery

The recent meltdown of the technology sector is a temporary phenomenon. The fundamentals of this sector are rock solid. We must not forget that the growing demand for hi-tech superior products has acted as a catalyst for the sector in an otherwise tough environment. At present, this sector is highly lucrative as a long list of tech behemoths are available at attractive valuations.

A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, has given a boost to the overall space. Consequently, the technology sector has vast potential.

Our Top Picks

We have narrowed our search to five Nasdaq Composite listed technology bigwigs with strong growth potential for the rest of 2022. These stocks have seen positive earnings estimate revisions in the last 90 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past three months.


Image Source: Zacks Investment Research

Cadence Design Systems offers products and tools that help customers design electronic products. Through the System Design Enablement strategy, CDNS offers software, hardware, services and reusable IC design blocks to electronic systems and semiconductor customers.

Cadence’s performance is being driven by strength across segments like digital & signoff solutions and functional verification suite. CDNS is also gaining from higher investments in emerging trends like IoT and autonomous vehicle sub-systems along with strength in the semiconductor end-market. Frequent product launches are expected to help CDNS sustain top-line growth.

Cadence Design Systems has an expected earnings growth rate of 24.9% for the current year. The Zacks Consensus Estimate for current-year earnings improved 5.7% over the last 30 days.

Texas Instruments is benefiting from a continued rebound in the automotive market. A solid demand environment in the industrial end market contributed well. Growing momentum across the communication equipment and enterprise systems markets will benefit TXN in the long haul.  

Additionally, the strong performance of Analog and Embedded Processing segments contributed well. Solid investments in new growth avenues and competitive advantages are acting as a tailwind for TXN. Further, the company’s portfolio of long-lived products and efficient manufacturing strategies are the other positives.

Texas Instruments has an expected earnings growth rate of 13.2% for the current year. The Zacks Consensus Estimate for current-year earnings improved 6.5% over the last 30 days.

Palo Alto Networks has been benefiting from continuous deal wins and the increasing adoption of its next-generation security platforms, attributable to the rise in the remote work environment and the need for stronger security.

Growing traction in Prisma and Cortex offerings are acting as a tailwind. PANW continues to acquire new customers and increase wallet share with existing customers. Palo Alto Networks’ higher sales incentives related to next-generation Security products are likely to continue to negatively impact its bottom line.

PANW has an expected earnings growth rate of 24.3% for the current fiscal-year (ending July 2023). The Zacks Consensus Estimate for current fiscal-year earnings has improved 0.1% over the last 60 days.

Intuit is benefiting from strong momentum in online ecosystem revenues and solid professional tax revenues. The TurboTax Live offering is also driving growth in the Consumer tax business.

Solid momentum in INTU’s lending product, QuickBooks Capital, remains a positive. Moreover, Intuit’s strategy of shifting its business to a cloud-based subscription model will help generate stable revenues over the long run.

Intuit has an expected earnings growth rate of 16.3% for the current year (ending July 2023). The Zacks Consensus Estimate for current-year earnings improved 1.2% over the last 90 days.

Fortinet is benefiting from rising demand for security and networking products amid the coronavirus crisis as a huge global workforce is working remotely. FTNT is also benefiting from robust growth in Fortinet Security Fabric, cloud and Software-defined Wide Area Network offerings.

Moreover, continued deal wins, especially those of high value, are solid drivers. Higher IT spending on cybersecurity is further expected to aid Fortinet to grow faster than the security market. Also, focus on enhancing its unified threat management portfolio through product development and acquisitions is a tailwind for FTNT.

Fortinet has an expected earnings growth rate of 30% for the current year. The Zacks Consensus Estimate for current-year earnings improved 2% over the last 30 days.


How to Profit from the Hot Electric Vehicle Industry

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See Zacks' Top Stocks to Profit from the EV Revolution >>

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Texas Instruments Incorporated (TXN): Free Stock Analysis Report
 
Intuit Inc. (INTU): Free Stock Analysis Report
 
Cadence Design Systems, Inc. (CDNS): Free Stock Analysis Report
 
Fortinet, Inc. (FTNT): Free Stock Analysis Report
 
Palo Alto Networks, Inc. (PANW): Free Stock Analysis Report
 
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