Huge Technology Rotation is an Opportunity

That’s great news for value hunters. The technology sector is seeing some huge rotation.

Tech Rotation Great for Stock Pickers

In other words, the tech sector has some stocks winning while others are losing. For instance, semiconductors, memory, and storage companies have zoomed. Conversely, software stocks have suffered.

When using the exchange-traded fund State Street Technology Select Sector SPDR ETF (XLK) as a proxy, you can see the tech sector is generally stagnant and trending down of late:

But there’s a bright side to this volatility. History shows it’s a great time to get in when tech sells this hard.

Let’s take a look at software. Using the iShares Expanded Tech-Software Sector ETF (IGV) as a proxy, you can see how it’s suffered:

All those red lines are institutional outflows. Big Money is dumping software stocks.

But here’s the thing – there are still quality companies in the industry. Two are Microsoft Corporation (MSFT) and Palantir Technologies, Inc. (PLTR).

Microsoft has seen selling dating back to last year:

But the fundamental picture of the company remains solid:

• 3-year sales growth rate (+12.5%)
• 3-year EPS growth rate (+12.6%)
• Profit margin (+36.1%)
• 1-year EPS estimate (+15.1%)

Source: FactSet

Similarly, Palantir has been hit with recent heavy selling:

Here, too, the company’s fundamental outlook is quite good:

• 3-year sales growth rate (+33.9%)
• 3-year EPS growth rate (+172.1%)
• Profit margin (+36.3%)
• 1-year EPS estimate (+42.2%)

Source: FactSet

Perhaps these companies are opportunities right now, as software generally takes a hit. While the future may seem uncertain, technology selloffs don’t occur often. The fact that the industry has roared back time and again suggests software may not be as dead as people think.

One More Software Stock Worth Considering

To illustrate the quality of company that’s being hit hard right now, let’s look at one more software stock worth considering due to heavy institutional outflows.

I’m talking about enterprise relationship management company Salesforce, Inc. (CRM). It’s been being sold by institutions for almost an entire year:

That big fall is not reflected in the company’s fundamentals:

• 3-year sales growth rate (+12.7%)
• 3-year EPS growth rate (+630.2%)
• Profit margin (+16.4%)
• 1-year EPS estimate (+11.8%)

Source: FactSet

Also, the company began paying dividends in 2024. It’s grown the payout since then but maintains a low payout ratio of 22.2%, indicating more growth ahead. The current forward yield is 0.73% with an annual payout of $1.66 per share.

So, an enterprise software company with solid fundamentals that’s been heavily involved in AI and pays a growing dividend is on extreme sale. This could be an opportunity worth exploring for long-term investors.

Opportunity to Pounce

Tech is seeing some massive selling in certain spots. But value hunters have an opportunity to pounce.

This is where MoneyFlows data can make a difference. See the underlying flows that make waves before they appear on the surface.

If you are a Registered Investment Advisor (RIA) or a serious investor, take your investing to the next level and follow our free weekly MoneyFlows insights.

Disclosure: the author owns MSFT in personal and managed accounts and holds no positions in PLTR or CRM at the time of publication.