Diversify your Big Tech holdings into these other stocks with similar traits, recommends Barclays

Published Wed, May 1 20246:55 AM EDTUpdated Wed, May 1 202412:09 PM EDT

In an effort to navigate a market that remains highly concentrated under Big Tech's dominance but also ripe for stock pickers, Barclays has dozens of stocks that share similar characteristics to the tech heavyweights. Equities slumped in April following five straight months of gains. The S & P 500 shed 4.2% for the month, its worst monthly performance since September. However, some select Big Tech companies remained fairly strong throughout the sell-off, with stocks like Alphabet and Apple bucking the downtrend. Barclays has noted that this "extremely narrow leadership" has made it hard for investors to beat the benchmark index with only about 15% of U.S. equity mutual funds outperforming the broader market's 25% return last year. Barclays analyst Venu Krishna said Big Tech valuations still appear reasonable but pointed out that they're "not the only game in town," suggesting that investors diversify their portfolios to beat their benchmarks. "Inter-sector and pairwise stock correlations remain at historic lows suggesting it is fertile ground for active management. Yet, market returns, earnings upside, and institutional investor exposure remain highly concentrated in Big Tech," Krishna said in a Tuesday note. "To 'broaden' sources of returns we think seeking elements of the fundamental characteristics of Big Tech outside in the rest of SPX (and beyond) can be a good starting point to deal with a concentrated market." How to find alternatives To find the optimal group of Big Tech alternatives, Barclays screened its universe of the top 3,000 U.S. stocks and narrowed the basket down to the 50 names with fundamentals similar to the major tech names that have the best risk/reward ratio. Aside from allowing investors to diversify, these stocks come with strong fundamentals based on profitability, balance sheet strength, cash conversion, and growth-adjusted valuation characteristics that closely resemble those of Big Tech stocks, the firm said. Here are a few of Barclays' picks that fit this criteria: Chipotle has among the highest year-to-date gains of Barclays' picks, as the burrito chain's stock price is up a whopping 39% this year. Shares rose 9.4% this quarter, fueled by the company's big earnings beat , better-than-expected revenue, and same-store sales growth from the first quarter as traffic to its restaurants increased during the period. Enthused by the quarterly print, which was released on April 24, UBS analyst Dennis Geiger boosted his price target by $100 to $3,500. "We expect the 1Q sales & earnings results, attractive brand positioning, and upside to estimates support further gains for shares," Geiger wrote in a Thursday note. "CMG maintains among the highest quality growth in the sector, w/ leading traffic momentum, & a resilient customer base, providing still compelling share returns in our view, even following YTD outperformance and at current valuation." Software company Oracle and computer networking giant Arista Networks also made the cut. Shares of both companies have gained roughly 10.5% this year. JPMorgan identified Arista as one of its top artificial intelligence picks in an April 23 note, saying the "optimism around rotating into non-AI on account of a recovery is too early to be justifiable." The firm thinks Arista is well-positioned in the cloud and AI space and said it could see long-term secular share gains with the company's enterprise customers. Moving away from the tech space, Barclays also named retailers Ulta Beauty and TJX Companies , which owns T.J. Maxx and Home Goods, as stocks with strong fundamentals that could broaden investors' portfolios. Both stocks have had a rough quarter due to a broadly cautious outlook on consumers' discretionary spending habits, with Ulta shares down more than 17.5% this year and TJX's stock up only 0.4%. To be sure, while Barclays analyst Adrienne Yih downgraded Ulta on Monday amid growing brick-and-mortar competition, she said she is sticking by the stock for the long run. "We are moving to the sidelines with a more cautious view on the near term. Longer term, ULTA is one of two specialty multibrand retailers with a best-in-class business model in the secularly growing beauty segment," Yih said. Despite its choppy start to the year, Goldman upgraded TJX to buy from neutral on April 24, turning bullish on the stock as it sees the company being a "market share winner" in an environment of value-conscious consumers.