- The volatile stock markets likely have investors on edge. Many are worried that a recession is imminent.
- But Colin Sebastian, an analyst with Baird Equity Research, is optimistic that the recent sell-off in the markets represents just a correction, not a sign of an economic downturn.
- If so, that could be a good sign for tech stocks; they’ve tended to post strong gains in rebounds after corrections, according to Sebastian’s data.
- But some stocks have done better than others, and Sebastian has three suggestions on which to pick.
With the stock markets facing turbulent times, many investors are likely wondering where to invest.
Colin Sebastian has some suggestions.
Although talk of recession is increasingly in the air, Sebastian, a financial analyst who covers internet and technology stocks for Baird Equity Research, is betting that the stock sell-off in recent months is simply a market correction, not the advent of an economic downturn. If that’s the case, the internet and video-game software sectors should be poised for a big rebound, he said.
“We think it is reasonable to consider a more optimistic outcome” than a recession, Sebastian said in a research report issued Wednesday.
That would have been a remarkable statement after the huge sell-off investors saw in recent weeks and have seen in recent months. But given the market’s rebound on Wednesday, he may be onto something.
To figure out what investors could expect in the case of a rebound, and where they should place their bets, Sebastian took a look at how the companies he follows performed after the four most recent market corrections.
On average, the internet companies he covers saw their stocks rise 11% in the six months after those corrections. The video-game companies did slightly better, rising 12%.
But those averages mask a lot of variation among the different companies.
Among the 15 companies he studied, just three traded higher six months after each of the four corrections on which he focused: Google parent Alphabet, Facebook, and Activision Blizzard. All three were also the best performers when it came to volatility — they each posted the lowest variance from their average price during those rebound periods.
But that doesn’t mean he thinks each one of those companies is a good bet this time around. Here are his picks:
Alphabet’s stock hasn’t been seen a huge bounce back in recent corrections. On average, it was up just 9% over the six-month periods.
But it was one of only three companies in Sebastian’s coverage area that showed a positive return in each of the four rebounds. And it gave investors less cause for stress than other stocks; its standard-deviation figure, which measures how much a stock varies from its average price, was just 0.05, which was the lowest among the stocks he covers.
Sebastian has an overweight rating on Alphabet’s shares and a $1,380 price target. In afternoon trading on Wednesday, its stock was at $1,023.92 a share.
Like Alphabet, video-game publishing giant Activision Blizzard posted a positive return in each of the last four rebound periods, according to Sebastian’s data. But it saw a much stronger bounce than Google’s parent.
On average, Activision’s stock was trading 19.4% higher six months after the correction. But with that stronger performance came more volatility. Its standard-deviation figure was 0.09 — nearly double Google’s.
Sebastian has an overweight rating on Activision and a target price of $85. In recent trading, its stock was at $45.65.
Amazon actually isn’t in the select group of companies that showed positive returns in the six months after each of the most recent corrections. And its volatility in those periods has been much higher than most of the other stocks Sebastian covers; its standard-deviation figure for the rebounds was 0.24.
But Sebastian thinks it’s a great bet anyway. In his universe of stocks, Amazon had the highest average return over those four rebound periods. Its mean six-month rebound was 30.1%.
Sebastian has an overweight rating on Amazon and a target price of $2,100. In afternoon trading, its stock was at $1,437.91.
Honorable mention: Take-Two Interactive
Take-Two Interactive, which owns and publishes the “Red Dead Redemption” and “Grand Theft Auto” franchises, hasn’t posted huge returns in the rebound periods Sebastian studied. On average, its stock appreciated 9.8% in the six-month periods after the most recent corrections.
But it’s been a steady performer with little volatility. Its standard-deviation figure was just 0.07 during those periods, tied for second least in Sebastian’s universe.
Take-Two has an overweight rating from Sebastian, who has a $145 price target on its stock. In recent trading, the company’s shares were at $102.75.
Honorable mention: Facebook
At least by Sebastian’s analysis, Facebook has a lot to recommend it. It’s one of three companies whose shares appreciated in each of the last four rebound periods after a correction. On average, its stock was up 15.4% six months after those downturns. And it had very little volatility in those recoveries; its standard-deviation figure was just 0.07.
But it didn’t make Sebastian’s cut of best bets because of all the controversy that continues to surround it.
“There are likely lingering overhangs impacting Facebook shares (e.g. data/privacy, slowing growth/usage, declining margins, leadership questions) that could dampen the recovery, without a clean quarterly beat and/or substantive evidence that the company is emerging from crisis management,” Sebastian said in his note.
Still, he has an overweight rating on Facebook’s shares and a $195 price target. In recent trading, the company’s stock was at $132.29 a share.
Get the latest Google stock price here.