Technology Stocks to Buy as Earnings Kickoff

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There are many good reasons to be thankful. Not to invest in tech stocksNow is the right time. In a challenging economic environment, the next earnings season is More trouble is likely. Experienced investors know that stocks should be bought when the conditions are worst.

This is the time to follow the timeless advice of the Hall of Fame outfielder “Wee Willie” Keeler: “Hit ’em where they ain’t.”

One place they ain’t is China, and the latest economic data show why: On Friday, the country reported just 0.4% gross-domestic-product growthIn the second quarter. It’s China’s slowest growth since the first quarter of 2020—the early days of the pandemic—and a reflection of the recent two-month lockdown in Shanghai and other regions.

Markets aren’t exactly full of optimism about China, but Mizuho analyst James Lee thinks it’s time for investors to take a fresh look at China’s internet sector. The


KraneShares CSI China Internet

exchange-traded fund, a popular way to track Chinese internet stocks that’s better known by its ticker KWEB, has lost about two-thirds of its value over 18 months. It’s been pressured by the Chinese government’s crackdown on the tech sector and rolling factory shutdowns tied to the country’s zero-Covid policy.

China’s economy has been battered by Covid outbreaks, rising unemployment, and a slow property market. Lee notes that in China, the unemployment rate reached 6.9% in May. This is the highest figure since 2018. He believes China has the best chance to offer investors solid financial foundations, including low inflation and strong consumer savings.

China is becoming more supportive of the U.S. economy while the U.S. tries to slow it down. China has provided tax credits for businesses and relaxed Covid restrictions. The country is offering “consumption vouchers”Up to 40% of the population can use online shopping at discounts up to 20%.

Lee suggests investors keep an eye on two upcoming events: China’s National Economic Council meeting in late July could feature additional stimulus policies, he says. And he thinks the 20th National Congress of the Chinese Communist Party later this year could lay out an “exit policy” from the country’s zero-Covid plan.

Lee’s still-contrarian advice to investors: Rotate from U.S. internet stocks into Chinese internet names. Lee particularly likes e-tailers that are consumer-facing



Alibaba Group Holding

(BABA)



JD.com

(JD). He’s also bullish on



Baidu

(BIDU), an online search engine that has grown to include a thriving cloud-based business, is BIDU. He enjoys the online agency for travel.



Trip.com Group

(TCOM), a sign of a potential increase in Chinese tourists to China in 2023.

Another option: Buy a few shares of KWEB, which owns all of Lee’s picks, along with other key players like



Tencent Holdings

(700.Hong Kong),



Meituan

(3699.Hong Kong), and



Pinduoduo

(PDD).

Another place they ain’t? Micro-caps as well as small-caps. The Russell 2000 Growth index is a rough proxy of small-cap tech shares. It has fallen 29% from last year and trails the Nasdaq Composite as well as other major market indicators. Are there bargains? For some suggestions on small stocks that are worth buying, I spoke with two managers of small-cap hedge funds.

Jeff Meyers runs Cobia Capital Management, a small-cap tech fund that traffics in some of the market’s more obscure merchandise. He’s currently focused on finding recession-resistant picks with rational valuations that other investors are missing.

Meyers loves one stock:



Iteris

(ITI), traffic engineering company which trades at a fraction of the 2023 projected sales but is growing and profitable. Another one of his picks?



A10 Networks

(ATEN), cybersecurity company that trades for about three times forward sales and approximately 15 times earnings.

Meyers remains bullish as well.



Silicom

(SILC), an Israeli networking company, trades for just over one times forward sales. It also trades for about 10 times earnings. He believes both sales and operating margins could double starting from here. The $35 stock could potentially reach $150 in just a few more years. This one may ring a bell. Meyers wrote the Similar pick available here in early 2021Silicom shares are flat since.

Quent Capital’s portfolio manager Gregg Fisher uses a global approach for small-cap investment. His core thesis is that over long periods, small-cap growth tends to outperform large-caps by two percentage points a year, but he notes that small-caps as a group “have miserably underperformed” over the past 15 years. He expects that the trend will turn.

In the short-term, Fisher remains cautious. Usually positioned about 70% net long, his current stance is “substantially lower than that,” for all the reasons noted earlier. Fisher still has plenty to offer in stock picks.

He’s bullish on



Fiverr International

(FVRR), a marketplace that allows freelancers to connect. He believes there will be continued growth in even a soft economy. He loves to



Vuzix

(VUZI), which produces augmented-reality glasses for industrial applications and the billing software company



Bill.com Holdings

(BILL). He’s also keen on



Toast

(TOST), which offers a digital payment platform for restaurants.

Like Mizuho’s Lee, Fisher sees some merit in revisiting the China market. He holds a stake in



Uxin

(UXIN), a China-based used car platform, went public in 2018 for $9 per share and trades now for less than 80c.

“Having zero exposure to China makes no sense,” he says. “It’s a really good time to consider dipping your toes in the water.”

But keep in mind we’re in rough seas. If you choose to wade deeper, remember there’s no lifeguard.

Write to Eric J. Savitz at eric.savitz@barrons.com

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