Just weeks after the Nasdaq Composite flirted with a new all-time high, the tech-heavy index has sunk into a correction (defined as a pullback of at least 10%).
Concerns about President Trump's trade wars, weakening consumer confidence, and stretched valuations have rapidly flipped investor sentiment on its head. Fears of a looming recession are also swirling around the market.
While it's frustrating to see the value of your portfolio shrink, seasoned investors know that stock market sell-offs can create excellent buying opportunities as otherwise promising growth stocks tend to get hit by investors rushing to lock in gains and protect themselves from further price declines.
In my view, these two stocks are shaping up as attractive buys during this market correction.
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1. Axon Enterprise
Axon Enterprise (AXON +1.58%) was one of the top-performing stocks in the S&P 500 last year with a 130% gain, and it has been a big winner over the last decade as well.
Axon is a leader in law enforcement technology. It makes Taser conductive electrical weapons, body and dashboard cameras, and several cloud software programs that help law enforcement agencies manage records and evidence. The company is also investing in cutting-edge artificial intelligence (AI) technology with a new generative AI tool called Draft One that produces first drafts of police reports based on body cam and dash cam footage. The time-saving product has been well-received by police officers.
The stock fell sharply in mid-February on news that it had dissolved its partnership with Flock Safety over a contract dispute. However, during the fourth-quarter earnings call on Feb. 25, Axon management expressed optimism about the possibility of the two companies negotiating a fresh agreement on new terms. Better-than-expected fourth-quarter results also gave the stock a boost, but it's still down 25% from the all-time high it logged earlier this year.
Meanwhile, the broader market sell-off has put additional pressure on premium-priced stocks like Axon, which trades at a price-to-sales ratio of 21 and a price-to-earnings ratio above 120.
NASDAQ: AXON
Key Data Points
However, even if the U.S. economy continues to weaken, Axon has a number of advantages that make it an attractive buy at these levels. First, its primary clients are local and state law enforcement agencies, which can be more insulated from economic cycles than private companies. Meanwhile, the Trump administration's focus on public safety and immigration enforcement could also favor the company.
With its complementary hardware and software offerings, Axon has a strong set of competitive advantages, and management expects revenue to grow another 25% to between $2.55 billion and $2.65 billion this year. The company looks on track for steady growth regardless of the stock market's fluctuations, and investors can take advantage of the recent sell-off to pick up shares.
2. Taiwan Semiconductor Manufacturing Company
Taiwan Semiconductor Manufacturing (TSM +6.30%), or TSMC, doesn't trade on the Nasdaq, but its status as the world's biggest third-party semiconductor manufacturer means it trades in tandem with the tech sector -- and more specifically, chip stocks.
Given its pivotal role in the tech industry, TSMC is sensitive to the state of the global economy as chip demand and prices tend to fluctuate with the economic cycle. However, the AI boom has created a robust tailwind for TSMC that should persist even amid creeping economic uncertainty.
In the fourth quarter, revenue jumped 39% to $26.9 billion, and the business was highly profitable with an operating margin of 49%. Companies like Apple, Nvidia, Broadcom, and AMD all count on TSMC to manufacture their chips, and its advanced chip manufacturing capabilities also put it far ahead of competitors like Intel and Samsung.
NYSE: TSM
Key Data Points
Despite that strong growth and profitability, TSMC shares have been swept up in the market sell-off -- the stock is now down 24% from its peak in January. Moreover, unlike a lot of tech stocks, TSMC offers a great value right now with a price-to-earnings ratio of just 25.
Like any other semiconductor company, TSMC is vulnerable to the impacts of a recession, but as its recent results -- and the ongoing growth of partners like Nvidia -- show, the current tailwinds in the chip sector are strong. The AI race should support the growth of the foundry business in the coming years, and TSMC is investing heavily in new factories in the U.S. and elsewhere.
The company's latest monthly update showed revenue jumping 43% year over year in February. It's rare to get a chance to purchase a stock with the growth rates and competitive strengths of TSMC at a valuation that's in line with the average for the S&P 500. It's worth capitalizing on the opportunity.
