2 Tech Stocks for Playing Defense this Summer

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It is still early, but the signs so far are that this could be a turbulent summer for stock investors. Treasury yields are falling dramatically, resulting in a worrying inversion of the yield curve. Markets, like oil, that often reflect economic prospects are dropping too, and a resolution to the trade war seems further away with every tweet.

History has shown time and again that the best option for long-term investors at a time like this is to ride it out, but that can be hard when you are hearing bad news from every side.

One way to make panic less likely is to make some changes to your portfolio. Doing something makes it less likely that you will be tempted to do something silly like selling everything. Moving to a more defensive, less-risky stance in your stock holdings is a good start. Right now, the best way to do that may well be to do something counterintuitive: buy some tech stocks.

In the minds of many investors, tech stocks are equated with risk. We tend to think of them as young, dynamic companies, challenging the status quo and taking chances as they do. That, however, is a dated misconception.

Twenty-five years ago, anything to do with computers was revolutionary and that was a fair view of the whole sector, but not today. Now there are lots of “tech” companies that, from any perspective other than the industry they are in, would be considered mature, safe investments.

Take, for example, Microsoft (MSFT) and Cisco Systems (CSCO).

I am old enough to remember when both of those companies were viewed as disruptors and there were still people around who maintained that this whole "computer thing" would never catch on. The stocks were volatile, so trading them was fine, but investing in them for the long-term was considered as naïve at best.

Now though, both have market caps that are measured in the hundreds of billions, with billions of dollars of free cash flow and further billions of cash in hand.

Those solid balance sheets and cash flow positions mean that the existential risk that is present for some stocks simply isn’t there with either CSCO or MSFT. If the predictions of an economic slowdown come true it is quite possible that both will see some slowing of growth, but when all is said and done, they will be fine.

That makes them “safe” buys and that helps to explain why CSCO and MSFT have outperformed the index consistently over the last few months, both on the way up and on the way down.

Other than stability though, there are two other things that make MSFT and CSCO ideal places to run to this summer.

The first is that if things don’t turn out to be as bad as feared, they still offer the chance of significant gains. If things work out okay, both CSCO and MSFT are, unlike most traditional defensive stocks, well placed to take advantage. Remember, what we have right now is not weakness but fear of weakness and missing out on the jump that could come should that fear decline would be almost as bad as taking a loss on the drop it is causing.

The second is that while that growth is still possible, both pay a dividend that will cushion any downside. CSCO yields 2.6%, while MSFT returns around 1.5%. Economic weakness going forward, for whatever reason, would make a rate cut far more likely, and stocks that pay a reasonable dividend and have the balance sheet to continue doing so would receive support as a result.

So, as strange as it may seem, the best place to “hide” for the summer may be in tech stocks. Not all of them, of course, but the more mature, stable companies in the sector offer the prospect of relative stability, but also the chance of profit on a bounce-back. That makes them worth buying if you feel you should be doing something as the storm clouds gather.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Technology , Economy , Investing Ideas , Stocks , US Markets
Referenced Symbols: MSFT , CSCO

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