Dell, HPE Lead Rally in Cheap Stocks as Rates Surge

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(Bloomberg) -- The rout in high-valuation stocks is adding renewed fuel to the rally in older technology companies that boast higher profits and often trade at a discount to the broader market.

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Hewlett Packard Enterprise Co. and Dell Technologies Inc. are among this year’s rare winners in the tech sector as a jump in Treasury yields has sparked a flight to cheaper and more profitable businesses at the expense of high-flying growth names that outperformed for much of the pandemic.

“We’re finding better values in the high-quality space,” said Kevin Caron, senior portfolio manager at Washington Crossing Advisors, which has $7 billion in assets under management. “Tech is excellent because you can find companies that have low debt, high profitability, and very predictable businesses.”

The tech-heavy Nasdaq 100 Stock Index has fallen more than 2% to start the year. Meanwhile, HP Enterprise and Dell, both trading at less than 9 times estimated earnings for the next 12 months, have gained 9.1% and 8%, respectively. HP Inc., the maker of personal computers and printers, has advanced 4.2%. All three stocks have handily beaten the Nasdaq 100 over the past six months.

VMware Inc. is up 7.4% so far this year, and on Thursday, Monness Crespi Hardt & Co. upgraded the stock to buy. While investors have been focused on high-growth software names, it wrote, “we now believe the market will begin paying more attention to the company’s unique value proposition.”

David Kelly, chief global strategist at JPMorgan Asset Management, wrote in a note this week that “value stocks are at some of their cheapest valuations relative to growth stocks seen since the tech bubble.” He added that large-cap equities -- a category that includes marquee names such as Apple Inc., Microsoft Corp, Amazon.com Inc., and Alphabet Inc. -- “promise significantly more risk and less potential return than three years ago.”

VMware Inc. is up 7.4% so far this year, and on Thursday, Monness Crespi Hardt & Co. upgraded the stock to buy. While investors have been focused on high-growth software names, it wrote, “we now believe the market will begin paying more attention to the company’s unique value proposition.”

Bernstein analyst Toni Sacconaghi recommends a bias toward lower-valuation technology stocks, writing that for the cheapest quintile, five-year earnings growth expectations “are the highest in over a decade.”

“The stocks underperformed in the second half of ‘21, and the valuation spread between growth and value has widened,” Sacconaghi said in a research note this week.

He sees additional risk for the most expensive names in the sector, but favorable risk profiles for companies like HP Enterprise, International Business Machines Corp., and Dell, which he upgraded to outperform from market perform on Monday.

To be sure, some market watchers disagree. Goldman Sachs Group Inc. strategists on Thursday said there’s likely to be only a modest additional increase in longer-term yields, which means limited further risk to growth stock valuations. An economic slowdown also is an argument in favor of growth stocks, they said.

Tech Chart of the Day

The recent tech selloff has helped Apple Inc. widen its market value gap with Microsoft Corp. to the highest since January 2021 at nearly $500 billion. As recently as October, the two tech behemoths were fighting out the race for the world’s largest listed company.

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  • Infosys’s third-quarter earnings beat and bellwether TCS’s better-than-expected revenues offer some hope that the rally in India’s technology sector has further room to run, analysts say

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  • The investor group buying 51job is cutting its takeover bid for the Chinese online recruitment firm by about 28%

(Updates to market open, adds VMware upgrade.)

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