2 Tech Stocks To Watch During This Market Correction

2 Tech Stocks To Watch During This Market Correction

Posted On March 6, 2020 1:55 pm

It’s been a volatile past week and a half in the markets with the S&P-500 (SPY) plunging more than 15% from its February highs on an intra-week basis. While the market recovered some of its lost ground this week, it does not seem like we’re completely out of the woods yet. Despite the sea of red, however, there have been a few out-performers, and many companies are unlikely to see a significant impact on their FY-2020 annual earnings per share growth. These are the companies worth keeping a close eye on as they will likely be the first to emerge from the rubble and have the highest probability of heading to new highs in the back half of 2020.

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(Source: TC2000.com)

When it comes to which names are showing these characteristics, two clear stand-out names are outperforming the market with double-digit annual earnings per share growth; these names are Microsoft (MSFT) and Netflix (NFLX – Get Rating). Both companies are forecasted to grow annual EPS by 20% or more in FY-2020, with NFLX being the clear leader in the earnings growth department, based on estimates of over 55% growth in FY-2020. While solid fundamentals are certainly a reason to keep an eye on both MSFT and NFLX, the technical picture for both stocks is also impressive, with neither stock breaking its January lows on a monthly closing basis in the most recent correction. Let’s take a closer look at both stocks below:

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(Source: YCharts.com, Author’s Chart)

Beginning with Microsoft’s fundamentals, we can see that the company has a very impressive earnings trend, with annual EPS trending higher for the past four years in a row. During the period from FY-2016 to FY-2019, annual EPS has grown over 70%, from $2.79 in FY-2016 to $4.75 in FY-2019. However, the exciting news is that this earnings growth rate continues at a rapid pace despite starting from much higher levels, with a 20% growth in annual earnings per share expected for FY-2020. This figure is based on current estimates of $5.70 in EPS for MSFT, and estimates for FY-2021 are predicting yet another double-digit increase. Based on these robust forward estimates and a relatively reasonable valuation at 29x forward earnings, I believe the stock is one worth watching closely. If the stock could drop below $151.00 per share and closer to 26x forward earnings, I would strongly consider adding to my position.

From a technical standpoint, there’s a lot to like about Microsoft as well, as the stock has held up quite well during this recent market correction. While the S&P-500 broke below both its January and December lows in a flash during the correction, MSFT only briefly traded below its January lows, and never came close to approaching its December lows at $146.00. This suggests that MSFT is giving up ground grudgingly and that funds are eager to pick up the stock on any 20% corrections. As the chart below shows, Microsoft looks like it is trying to build a new base between $150 and $180 while the market corrects, and this is completely normal price action from a market leader. The key for the bulls going forward will be defending the…

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