These tech stocks still trade at a reasonable valuation, BMO says

Published Thu, Jan 11 20247:19 AM EST

Although many Wall Street analysts are forecasting a pullback for tech stocks after a momentous rally in 2023, BMO Capital Markets is sticking with its overweight outlook on the tech sector. The market has been sluggish to start 2024 — the S & P 500 is up just 0.8%, the Dow Jones Industrial Average by 0.3% and the tech-heavy Nasdaq Composite is higher by 0.7%. The slow start is partly due to concern that the mega-cap tech stocks that fueled 2023's gains have risen so high that they're now overvalued. BMO, however, disagrees, and says technology is still a top sector to invest in. "Remember, 2022 was an awful year for the sector and we believe that 2023 was partly a reversal of that," BMO chief investment strategist Brian Belski wrote in a Jan. 9 note to clients. "In fact, when putting Technology performance trends into a broader two-year time frame, the trends are certainly not stretched by any means and are about average when compared with the post Tech Bubble period," he said, referring to the 1990s dot com tech boom. Belski added that, based on BMO's analysis, the tech sector has continued to outperform about 80% of the time when it's experienced similar two-year performance as has recenty been seen. "While valuation is a sticking point, we continue to point out that it has been a horrible predictor for future Technology performance," said Belski. "The latest levels, while certainly stretched, remain below prior cycle highs and considerably below levels witnessed at the height of the Tech Bubble." The strategist noted that stock selection will be "extremely important" amid a decline in correlations within the sector. For example, investors will likely see better opportunities outside of the large-caps in the tech sphere, Belski added. One strategy he underscored is "growth-at-a-reasonable price," as part of a broader multi-factor ranking of potential opportunities. Here are some of the tech stocks that fall below the top 10% in market capitalization and still offer the highest composite multi-factor ranking. Chipmakers Applied Materials and NXP Semiconductors were among those that made the cut. BMO has a market perform rating on NXP but doesn't cover Applied Materials. Semiconductors have had a rocky start to 2024, with Applied Materials and NXP falling 7.6% and 8%, respectively, since New Year's. To be sure, both companies remain firmly higher over the past 12 months, with gains of 27% for NXP, and 39% for Applied Materials. Meanwhile, Cisco Systems has underperformed in the past 12 months, rising just 2.9%. Analysts are tepid on the stock, with two-thirds of those covering Cisco rating it no higher than a hold, according to Refinitiv. Data storage company Seagate Technology is down about 3% so far in 2024. Unlike BMO, most of Wall Street is cool on Seagate, with three-fifths of analysts who cover the stock rating it no higher than a hold, according to Refinitiv. The average price target suggests shares will pull back by more than 12% from Wednesday's close. Meanwhile, analysts are optimistic on hardware systems maker Oracle . The average analyst price target implies 22% upside potential, and 50% of analysts covering Oracle rate it a buy or strong buy, according to Refinitiv. —CNBC's Michael Bloom contributed to this report.