Tech Investing Guide To Playing The Bear Market's End At The Next Bull Market

Morgan Stanley says investors should start preparing their buy lists in advance of a bear market low for telecom (and media and technology).

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In a Monday note, Wall Street firm Bernstein forecasts the market is three months from bottoming, so a rebound in the second half of the year could benefit the technology sector significantly.

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Historically, tech bottoms along with the overall equity universe in bear markets, modestly underperforming at the low and then materially outperforming after the low. According to strategist Andrew Pauker, this happens with a 100% positive return hit rate (1, 3, 6, and 12 months after the low).

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Accordingly, the strategist provided investment recommendations for the period before, during, and after the trough in stock markets. When it comes to adding more risk to a portfolio, he typically advises investors to wait for a more "durable" bottom.

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Prior to the bottom, names with higher quality and greater defensiveness should do better, with names in the entertainment, internet retail, and software sectors dominating the market. Contrarily, semiconductors and tech gadgets typically do poorly during this time. This is due to the fact that chip stocks and tech products are less susceptible to interest rate changes than names of software companies.

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Netflix

was one of the brands Morgan Stanley advised for the time leading up to the market bottom. The streaming stock has an equal weight recommendation from analyst Benjamin Swinburne, who yet said that it continues to be a "scaled, lucrative market leader" in the industry. This year, Netflix stock has increased by around 6%.

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IBM

is another purchase to make before the bearish market bottom. The equal-weight rated stock, according to analyst Erik Woodring, is the "most defensive name in our universe" and frequently outperforms in late cycle situations. Woodring issued a warning that it performs poorly in the first cycle. Almost 8% has been lost by IBM stock this year.

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Verizon

is also a buy before a trough, and analyst Simon Flannery rates it overweight; the stock is down approximately 3% this year.

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Online retail, digital entertainment and services, semiconductors, and IT hardware are among the industries that have experienced the best relative returns since the bear market's trough, according to a note from Morgan Stanley.

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Significantly, bad quality exceeds high quality by 20% on average, while cyclicals outperform defensives by 28% on average, according to the note.

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Even though the stock has already increased by more than 16% this year, shares of Walt Disney Corporation are anticipated to do well after the trough. A healthier consumer and "a new strategy to control and maximize its Media business," according to analyst Benjamin Swinburne, should help the company's parks and advertising divisions.

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Cloud computing company Snowflake, rated overweight and off 1% in 2023, is another company Morgan Stanley suggests. According to analyst Keith Weiss, Snowflake is "ideally positioned" to profit as businesses expand their data cloud systems to accommodate AI and ML activities.

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SNOW should be among the first to accelerate out of the downturn when it comes to the consumption pricing model, because it is inherently volatile and more directly impacted by changes in the demand environment, Weiss wrote.

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In the meantime, Morgan Stanley said that Salesforce and Microsoft are solid buys for investors who are trading through the trough and into the bull market.