How to Find Compelling Tech Stocks in the Current Market

The past several months have been difficult for investors, especially in tech stocks. However, in this video clip from "The Virtual Opportunities Show" on Motley Fool Live, recorded on May 31, Fool contributors.com Demitri Kalogeropoulos, Travis Hoium, and Rachel Warren give some of their tips and metrics on how to find opportunities in a market where fear and instability are present.

Demitri Kalogeropoulos: Some analysts are saying many tech names are still overvalued and there will be a blood bath in July. Any opinion?

Travis Hoium: A lot of tech names are overvalued but based on traditional metrics. You can also make the argument that there are a number of tech companies that are very cheaply valued based on traditional metrics. My red flags go up when somebody says this is going to happen a month or two from now, because none of us know exactly what's going to happen in a month or two from now, especially in the market.

There has been a lot of pullback in a lot of tech stocks, so I'm finding more opportunities in that space today. The things that I'm looking at are, is the company generating positive free cash flow? Because if they are then they have the sustainability to get through any downturn if this lasts six months or if it lasts two years, we want to know that you're going to be able to come out of the end of this.

Then you might be able to be an acquirer too, as other companies struggle, you could actually come out of this current downturn even stronger. The other thing is, do you have a real competitive moat and a product that we're going to be valuing and not just something you were giving away at an unsustainable price at a certain point.

Sometimes we just don't need to overthink this stuff. Like Microsoft (MSFT 1.75%). Rachel brought up Microsoft. Like they're just a giant, they're not going anywhere. They are going to keep commanding a little bit more money from all their customers in the future. They are going to bolt-on products. We don't have to be in every high-growth tech stock in the space, and you can be really selective on the companies that you are in. That's just my thoughts.

I'm seeing more opportunities than I did six months ago. But that doesn't mean that we're not going to be in for a little bit of pain here in the short term, but I think long term, this is still going to be a great business. Low capital structure and high-profit potential long term. I think that's still going to be a winner long term.

Demitri Kalogeropoulos: Absolutely. Yeah, I agree with what you said when I hear someone say something like that, the market's going to do something in July.

Rachel Warren: How do they know? [laughs]

Kalogeropoulos: Remember these people, they don't have any accountability because I've been doing this long enough to know like, you can say that every month and then you'll be right one time out of 60, and then that's when everyone thinks you're genius because they don't really look at the track record.

Then the other thing is pessimism can sound really smart. Particularly at a time like this when people are kind of scared. Definitely just avoid. I would not give any credence to someone who is particularly like specifically saying what's going to happen in the market.

Hoium: It's a lot harder to be bullish on stocks today, but where you make your money is when you're doing the thing that the market really doesn't want to hear. I do try to be bullish when others are fearful, and we're seeing a lot of fear in the market doesn't mean we are at peak fear, but there's a lot of fear out there, so there are opportunities as well.

Warren: I do think just to add onto that, I do think fear sells as well. We know that. Some of these analysts, I think and they may be right, maybe there will be a tough time for tech stocks. But some of the same analysts were also saying that these were great companies to buy when shares of those stocks were soaring high and they looked really smart than two and maybe they were just, maybe they were ripe, maybe they weren't.

But I do think if you are put off by this space, no, you don't have to invest in tech. There's so many fantastic sectors and industries. I personally love the tech space. I have loved it before I became an investor and then once I became an investor, and to me, like Travis, I've looked at this time as a great opportunity.

You can deploy capital in really great companies and at lower than usual valuations. Now just because valuations are lower in this space, I still think it's super important to do your homework and get to know those companies inside and out before you buy in. Just because the stock is trading lower doesn't make it a great buy, but it can be a really great opportunity if you're bullish on this space and in a particular company in general, and you understand it well and you believe in it and you're willing to hold on it for many years, this can be a great time to put money in that space.

It's definitely not easy to be a tech investor right now. I feel that in my portfolio on the daily. But I try just not to check those stocks every day and I try to take headlines with a grain of salt. That's been my personal approach, but I get it, it can be a little discouraging sometimes if you're invested in this space, but I think there's still so much opportunity, so much exciting innovation here, and that's what I'm focused on.