What investors should look for before dipping back into tech stocks

Paul Meeks, portfolio manager and investment committee member at Independent Wealth Solutions Management, joins Yahoo Finance to discuss stock names investors should look at amid trade rotation.

Video Transcript

MYLES UDLAND: Let's stay on the markets here and talk a bit about everything that's happening in the tech space. Joining us now to discuss is Paul Meeks. He's portfolio manager and member of the investment committee at Independent Solutions Wealth Management. So Paul, let's start with your view on this rotation and how you guys are thinking about the trade that's taking place, how far you think it can go, how long you think it'll last, and what it says about the current moment in this cycle.

PAUL MEEKS: Sure. As most people know, I'm tech 24/7, 365. But I am worried after the monster rally we've had, and particularly the marquee names, that this rotation into value probably continues. I think the key that I'll be looking at, that we'll be looking at is what happens with the 10-year Treasury yield.

Now, we've kind of found a ceiling at about 1.4%, 1.5%. If we break through that resistance above, it could be some more pain in these tech stocks. Because as, you know, gross stock darlings, these are long duration assets and super sensitive on the downside to increases in rates.

So let's just see if the move that we've seen, which has been explosive with these short-term rates, continues. Can we pop 1.4, 1.5 the 10-year Treasury yield? But I would tell you this. I do think that over the last year or so, there is no surprise that we've gone at a increased pace from an analog world to a digital world. And COVID really accelerated that.

And so we have fundamentally some companies in the tech sector that are outstanding fundamentally. They will continue probably over the next couple of quarters, regardless of market action, to post upside surprises. I'll give you an example, Micron, MU, my favorite semiconductor stock in the tech sector. And semis is my favorite industry group in the tech sector.

It has been down the last couple of days. But yesterday, they pre-announced a monster upside. And I think this stock that's trading now at 87 in a couple years can be double that. And so, yes, you have to really be a rifle shooter, not a shotgun shooter, find these companies that do have some valuation support.

They do generate earnings. They do generate cash flow. They didn't just come to the dance through the work from home thesis. And I don't know how long and how deep this tech correction lasts. But I actually think we're going to set up for a real nice move in some of these when it's all over. But I just can't call that yet.

And frankly, if I had my druthers, I probably would have a portfolio today that has more value in dividend stocks than it is of my own tech sector.

BRIAN SOZZI: Paul, how will you know when to call it? When will you know that it's time to start buying some of these tech stocks really hand over fist after these, really, the sell off that we've seen accelerating over the past few weeks?

PAUL MEEKS: You know, that's an excellent question. I don't really think it's a fundamental issue. I really do think it's all about rates, which I am uncomfortable being a macro economist and making this call.

But as I said before, once we get to the point where we no longer have significant upward pressure on inflation, and of course, related to that, the yield on the 10-year Treasury debt, I can say, OK, I got some fundamental great stories. They've only been getting better during the COVID crisis. And we no longer have as much worry about increased rates.

And we have awesome fundamentals. And we have companies that over the next couple quarters, probably big upside in their estimates, both revenue and EPS. So let's make sure that we don't pop through that resistance on the 10-year. And then I think that's my call to get back in and get back in a big way.

JULIE HYMAN: Paul, it's Julie here. Micron, not your only pick within the chips. You like a number of the different chip makers. How are you thinking about the chip shortage issue? Because even if these companies have earnings power and revenue power, isn't that cap to some extent by some of the difficulties they're having on the manufacturing side?

PAUL MEEKS: Yeah, well played, another great question. When it comes to the more commodity-oriented parts of semiconductors, particularly memory, and that's why I choose Micron, you know, they dominate in DRAM and NAND flash memory. Then the pricing, which has been booming, is much more interest in me as a bullish factor than the fact that they're supply-constrained, which is obviously a at least modest bearish factor.

So man, with commodity chips, I love my pricing. And because I think that the supply shortage is transitory in nature, that's why I think, you know, Micron can explode over time. But yes, there are some stocks I like. Let's think about in the semiconductor space, another way to play to benefit from the chip shortages in the semiconductor capital equipment companies.

And there, I think, over time, you'll do very well with AMAT, who is the Applied Materials, the 800-pound gorilla, but all the other players too. ASM Lithography, KLA-Tencor, Kulicke & Soffa, Lam Research, they're all in my portfolio.

MYLES UDLAND: All right, really interesting conversation, Paul. Really appreciate you taking some time to join us this morning. Paul Meeks with Independent Solutions Wealth Management. We'll talk to you soon.