It's official: Equity markets in the U.S. have entered bear market territory. As of Wednesday, the Dow Jones Industrial Average is down about 33% from record highs, while the S&P 500 has slumped roughly 30% as well.
Investors are fretting over the novel coronavirus pandemic, and the massive decline in crude oil prices has exacerbated this decline. According to a Washington Post report, the S&P 500 has experienced 12 bear markets since World War II. The average correction in these bear markets has been about 33%, so it is quite possible that markets might move lower. The next few quarters of earnings reports will begin to shed light on how bad the pandemic has been for company financials as well as begin to outline expectations for the rest of 2020.
Several companies across industries have cut forecasts for the quarter ending in March because of lower consumer demand. Savvy investors know that it is impossible to time the equity markets and that they are better off identifying stocks with strong fundamentals and add to their position in those stock on major dips like the one we are currently dealing with.
To help in that regard, I have identified three stocks in the tech sector that have corrected significantly and might be worth a look for contrarian investors.
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1. Autodesk: Rising sales will benefit this software company
Autodesk (ADSK 0.65%) is a design software and services company. It offers solutions to customers in the manufacturing, architecture, infrastructure engineering, construction, and related verticals. Autodesk's stock price has fallen 25% from record highs due to overall market weakness. Despite the decline, shares have returned 159% in the past five years.
Autodesk has fast become an investor favorite for those looking to add software-as-a-service (SaaS) companies to their portfolio, as the company has changed its business model. It used to sell its software as licensing deals and switched to a SaaS model a few years back.
The company has seen sales grow from $2.1 billion in fiscal 2018 to $3.3 billion in fiscal 2020. According to consensus estimates, sales might reach $5.4 billion by 2023. Comparatively, the company's earnings are expected to rise by a stellar rate of 82% annually over the next five years.
The stock is trading at a forward price-to-earnings multiple of 36, which is quite reasonable given the company's long-term growth rates. One key driver of Autodesk's top-line growth is the potential growth in subscribers.
Currently, fewer than 5 million customers are paying subscribers, while 14 million are still using the company's legacy software. This transition is likely to help Autodesk sustain growth rates in the upcoming years.
2. Broadcom: A semiconductor giant
Broadcom (AVGO 2.99%) has created massive investor wealth in the past decade. The stock has gained over 1,000% since March 2010, despite a 30% decline in share prices in the past month. The company is a diversified chip manufacturer and has gained considerable traction in the software space via inorganic growth over the years. These acquisitions have helped Broadcom offset slowing chip sales in 2019, as it managed to grow overall revenue by 8%.
Now it expects the hardware business segment to return to growth in 2020 and has forecast revenue growth at 11% at its midpoint guidance. Adjusted EBITDA is also forecast to grow by 9% and earnings might increase 8% in 2020, according to consensus estimates. After accounting for a dividend yield of a tasty 5.5%, we can see that Broadcom's forward price-to-earnings multiple of 10.2 is more than attractive.
Investors are worried about Broadcom's high debt balance of $30 billion, but with operating cash flows of $9.7 billion, it can repay interest and principal to debtors. A key growth driver for Broadcom will be the transition to 5G smartphones, which will increase demand for the company's chip products.
3. Baidu: A Chinese internet giant
Baidu (BIDU 0.72%) is China's leading search engine. In the past month, Baidu stock is down 26%, which is roughly in line with the broader market decline. Baidu generates 100% of sales from China, and investors would have expected a sharp downturn as the country is the epicenter of the COVID-19 outbreak. However, the company's already-cheap valuation has helped stem a steep decline.
Baidu stock has significantly underperformed the broader markets since the start of 2018. It is trading 64% below record highs, as shares were first impacted by the U.S.-China trade war, a slowing domestic economy, lower-than-expected growth, and the broader market sell-off.
In 2019, company sales rose 5% year over year to 107.4 billion yuan ($15.3 billion). According to consensus estimates, sales growth is pegged at 4.2% in 2020 and 14.5% in 2021. While earnings are expected to fall 12% this year, they are expected to rise by 38.5% in 2021.
Baidu stock is trading at a forward price-to-earnings ratio of 15, which is an attractive multiple given the estimated growth rates.
The verdict
We have seen that the three tech stocks are trading at eye-catching valuations. However, investors should note these valuations are based on estimates that might be outdated and can very well be revised lower in case the pandemic continues to weigh heavily on consumer demand.
The upcoming quarterly results will shed more light on the financials of these tech heavyweights that have already lost significant momentum in the past month. The broader markets will continue to remain volatile and might move lower by the end of March. Comparatively, the fundamentals of Baidu, Autodesk, and Broadcom remain strong, and investors can look to buy these stocks at major price dips.
