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FORTUNE.COM // DECEMBER 2019
TECH STOCKS
The biggest names may not generate the biggest gains
in the year ahead.
S
HARES OF THE BIGGEST Big Tech companies—Google,
Amazon, Apple, Facebook, and Microsoft—have been
on a powerful run over the past decade. But 2019
may be the year they lost their aura of indestructi-
bility. These top performers face growing regula-
tory scrutiny over privacy concerns, both in the U.S. and Europe,
alongside populist calls for breakups from across the political
spectrum. “There could be some significant impacts on technology
depending on how the election goes or who wins the [Democrat-
ic] nomination,” notes Nuveen’s Malik. And trade tensions have
threatened some companies’ customer bases and supply chains.
The upshot is that picking winners in this always-potent sec-
tor is getting trickier. Case in point: semiconductors. That very
cyclical industry is poised for an upswing, with demand boosted
by continual innovations in smartphones and the impending
rollout of 5G wireless networks. But the geopolitics of U.S.-China
relations are making life volatile for some chipmakers. One safer
play: Synopsys, whose electronic data automation software is
used by semiconductors to design chips—and which doesn’t
face tariff challenges. The company maintains customer loyalty
with three-year, noncancelable subscription contracts that help
insulate its sales from downturns. And its technology comes with
a steep learning curve for engineers, which boosts Synopsys’s
renewal rate. That “translate[s] from a financial perspective,”
says Lori Keith, who manages the $4.2 billion Parnassus Mid
Cap Fund. Synopsys’s next avenue for big growth, says Keith: the
increasingly chip- and software-dependent automotive sector.
Another promising play: ASML, a Dutch company that pro-
duces components for semiconductor makers. James Gautrey, a
portfolio manager at $565.5 billion asset management company
Schroders, thinks trade jitters will be irrelevant in the long term for
the sector in general and for ASML in particular, which he deems a
“classic 10-year-plus hold.” ASML is projected to grow revenues by
13% in fiscal 2020, and Gautrey sees much more upside.
The telecommunications and hardware behemoth Cisco has
slumped in the market recently, trading at 15 times estimated
fiscal 2020 earnings. (The sector average is over 20.) But Cisco’s
huge portfolio of products and patents in networking equipment
is well positioned to benefit from the rise of 5G and growing en-
thusiasm for the Internet of things.
Money managers certainly aren’t abandoning the biggest tech
names. Matt Benken dorf, CIO of asset manager Vontobel Qual-
the two dozen sources who spoke to Fortune
for this feature forecast a full-blown eco-
nomic downturn or recession in the next 12
months. And none said they were seeing the
kinds of asset bubbles that preceded the 2007
and 2001 market crashes. Consumer spend-
ing—which represents 70% of the nation’s
GDP—shows no signs of letting up, especially
with unemployment at 50-year lows. Most
forecasts have the American economy chug-
ging along at around 2% growth next year.
Still, even that modest forecast may be
optimistic. There’s growing concern that the
current administration’s erratic trade policy
and hostility to immigration, combined with
a rapidly climbing federal debt load, may
constrain growth even further. (For more, see
Geoff Colvin’s feature in this issue.) Combine
that with historically high stock valuations
and slowing corporate profits, and it’s clear to
see why our sources included few stamped-
ing bulls. “Fundamentally, I think people need
to expect lower returns going forward,” says
Ron Temple, managing director and head of
U.S. equities at Lazard Asset Management.
“Heading into year 11 of an expansion, earnings
growth is more limited.”
Others make the case that concern about
slowing long-term growth could, ironically,
spark faster short-term growth—especially
with someone’s reelection campaign underway.
Morgan Stanley’s Slimmon says the market
could “break to the upside” if, for example, the
President were to fast-track a China trade deal.
Still, even if investors can’t expect anything
much better than so-so from stocks, there will
be plenty of opportunities to make money.
Some are in sectors that are less vulnerable to a
broader slowdown—think tech and consumer
goods. Others are in the financial and health
care sectors, where investors’ recent skittish-
ness has left many stocks unfairly undervalued.
With all that in mind, here are 27 stocks
and two ETFs that show signs of promise.
Most are poised to do well even if the econ-
omy stays sluggish. A few are “bold bets” for
those who are feeling more optimistic about
the market or the economy—folks ready to
put the “brave” in a brave new decade.
STOCKS AND FUNDS
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