Stock analysis

3 Under-the-Radar Tech Plays

Big tech stocks have stuck like glue to 2017 highs since the market-leading group stalled out in July following a historic advance. Sidelined players looking to buy pullbacks have been denied low-risk entries during this period, signaling resilience that could eventually yield another round of new highs. However, it is risky to buy high in hopes of selling even higher, while the lack of a long-overdue correction could keep those folks on the sidelines indefinitely.

One profitable alternative is to step away from the most widely held issues and seek out hidden tech gems with plenty of potential upside. Mid-cap issues offer better value in this exercise than blue chips because funds and institutions have focused their firepower at the highest end of the capitalization spectrum this year, as evidenced by the lagging performance of the S&P Midcap 400 Index. (See also: How to Analyze Mid-Cap Stocks.)

This group’s best bets should come with tech stocks that have broken out to new highs and are pulling back or have spent weeks to months building consolidation patterns that should yield secondary breakouts. In addition, recovery plays cannot be ruled out as long as there is plenty of space between the currently traded level and the prior high, allowing broader tech strength to float those underperforming boats.

Paylocity Holding Corporation (PCTY) provides cloud-based human resources and payroll software. It came public at $31 in March 2014 and fell into a decline that posted an all-time low at $15.24 two months later. The subsequent recovery wave broke out to a new high in April 2015, ahead of a trend advance that stalled in November in the mid-$40s. The stock tested that level in August 2016, yielding a multi-month reversal into the February 2017 low at $29.69.

The stock returned to multi-year range resistance in May 2017 and dropped into a rectangular range that is still in play more than three months later. A sell-off into August held support at the 50-day exponential moving average (EMA), generating a buying wave that is now testing the breakout level. A rally above $50 should attract momentum-fueled buying interest while signaling a major uptrend that targets the low $70s. (For more, see: Paylocity Q2 Loss Narrower Than Expected, Revenues Top.)

Workiva Inc. (WK) offers cloud-based enterprise software products for productivity, accounting and auditing purposes. It came public at $14 in December 2014 and built a choppy trading range between $12.25 and $16.00 into an October 2015 breakout hat stalled in the upper teens. A September 2016 test at that resistance level triggered a reversal that posted a higher February 2017 low at $12.15.

The stock returned to range resistance in June and broke out immediately, lifting to an all-time high at $20.95, ahead of a downturn that is grinding out a bullish consolidation pattern on top of new support. On-balance volume (OBV) has held near an all-time high, predicting that a breakout above four-week resistance at $20 will offer a reliable entry, ahead of a healthy trend advance that could reach the mid-$20s. (See also: Workiva Partners With Armanino to Boost Wdesk Offerings.)

Zynga Inc. (ZNGA) makes video games for mobile devices. It posted an all-time high in the mid-teens just four months after its November 2012 IPO at $11.00 and then plunged to $2.10, ahead of a bounce that stalled just under $6.00 in March 2014. The stock spent the next two years testing 2012 support, finally completing a base breakout when it rallied above resistance at $3.15 in May 2017.

The uptick stalled in June at $3.82, easing into a trading range that has drawn the outline of a symmetrical triangle. A breakout will also clear the 50% retracement​ of the 2014 into 2016 decline, targeting continued upside that could eventually reach the prior high and signal a new uptrend. OBV has held close to the rally high, pointing to a loyal shareholder base looking to profit in the fourth quarter. (For more, see: 5 Worst Ideas Zynga Ever Had.)

The Bottom Line

Big tech stocks have held close to all-time highs, denying easy entry to risk-conscious market players. Mid-cap components show a more favorable risk/reward profile at this time, testing new breakouts or consolidating gains through high-odds continuation patterns. (For additional reading, check out: Tech Stocks Are Ready to Rally Once Again.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>