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How to Play the Great Tech Stock Sell-Off

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Strategists have been slow to pin the blame on any single catalyst for the tech stock sell-off that mired the week in trading. After all, the summer has been characterized by a hybrid form of growth investing. Targeting tech stocks that pander to a quarantined world, investors with perhaps more appetite for risk than actual expertise caused rampant momentum in the markets.

In a way, 2020’s hectic growth market has been a reprise of the record-breaking bull run that presaged the pandemic. But it had to come to an end. Investors got a brief taste of just how dangerous overvalued tech stocks could be when the Moderna breakthrough kneecapped Shopify (TSX:SHOP)(NYSE:SHOP) by 10%. This time around, the tech stock sell-off was kicked off by the Tesla and Apple stock splits.

The twin moves caused a rash of investor interest, much of which arguably originated among inexperienced traders looking for once-in-a-lifetime deals. Phrases like “stocks to retire on” bounced around social media. But the boom was followed by the bust, and the very next day the selling began. Then it continued, spreading like a wildfire through the overvalued tech stock space and beyond.

Buy tech stocks with extra caution this fall

Investors looking to snap up bargains still have a chance to. However, many names that satisfy a tech growth thesis are still overvalued. This is nothing new. However, if investors want to bag some real bargains, they might want to hold off. All the signs are pointing to a much sharper market correction. While this is a knee-jerk function of the markets, it also makes current valuations dangerous. And the next sharp correction could be a lot broader.

One way to play a deteriorating market is to “eat little and often.” Now, this sounds like the kind of advice more commonly dished out by dietitians. In this context, though, it refers to building positions more slowly, as the market takes further steps downward. If in doubt, buy the red ink. On the flip side, sell underperforming names when they’re in the green. Sticking to this plan will help to optimize a stock portfolio during a staggered series of sell-offs.

Shopify pulled back 10% this week. This is one of the few hype-generating names that exhibits both the quality and outlook to grow further in 2021. Other names, such as Descartes Systems Group, are of the “old reliable” stable of tech stocks. The latter name is likely to continue rewarding growth investors, though with less of 2020’s frenzied momentum.

Descartes pulled back less than Shopify did this week, with a five-day drop of 6.6%. Up 35% year on year, Descartes is a much lower momentum play than the e-commerce superstar stock. That makes it less of a risk in a long-term portfolio. However, it’s also the perfect foil to Shopify, adding the shipping side of logistics to a digitalized retail play. This could make both names a complementary play for long-term tech investing.

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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. David Gardner owns shares of Apple and Tesla. Tom Gardner owns shares of Shopify and Tesla. The Motley Fool owns shares of and recommends Apple, Shopify, Shopify, and Tesla.

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