The January was a difficult month for markets, as the S&P 500 IndexThe bank suffered the worst monthly performance in almost two years. The majority of this carnage was caused by technology. Investors became scared by notable earnings misses, and the possibility of four Federal Reserve interest rate increases in 2022.

It is good to know that revenue-multiple compressions within this sector are usually short-lived. In September 2000, tech took another blow like this. Despite economic headwinds, it was over in eight months.

It is a different landscape. The economy has a different look today, despite the fact that inflation is high. strong and corporate earnings, broadly, remain solid — all of which provides a good foundation for a quicker technology recovery this time around.

However, we are not at the bottom. It is possible that this will happen following the Fed’s March rate hike. This will again rattle growth stocks and set the scene for bargain hunters, especially if the Fed raises rates in March. deviates from the norm and institutes a half-point increase.

Although the tech and software drawdown was more rapid than expected, it is in line with previous slumps which coincided with rate rises. Software firms trade at around twice the average 20-year rate.

Still, no one should expect multiples to approach historical averages, especially among software-as-a-service, or SaaS, firms. These firms are able to generate healthy subscription revenues, which allow them expand margins while also generating more cash flow.

Also, the valuations that are so high in this sector can be justified. With many software companies reporting strong results, fourth quarter earnings should bear this out.

So where are good places to invest?

These are the Stalwarts Adobe, Autodesk IntuitThere will be clear upside once the tide changes in the aftermath of Fed’s initial increase. This is due to the Fed’s defensible business model and strong cash flow. These are not mature businesses, so it is unlikely that these companies will make large gains.

There will be more growth opportunities for less-established, more battered companies with resilient businesses. Notably, Zoom Video CommunicationsSince its peak, it has lost more than 75%. This massive drop suggests that the pandemic was short-term and not caused by serious problems.

It is actually more complicated than that. Although the company reached silly heights during 2020 when work-from home models were firmly established, Zoom will still be used by many businesses. This includes those that prefer its simplicity over other similar platforms like Zoom. Microsoft Teams.

Millions of Americans will return to work one day at a time. Organizations large and small alike will need to take over legacy telephone systems that are in decline. This creates a massive opportunity for companies. Zoom will not capture all of that business but it will be able to continue growing.

Zoom currently trades at a discount compared to average SaaS business. After the company’s March 1 earnings report, Zoom will give 2023 guidance. This forecast could surprise those who believed the stock was one-hit-wonder and hedge funds which shorted it last quarter on implied billings growth.

This is the case CrowdstrikeThis is easier.

All sizes of businesses are moving their data to cloud storage, which has increased with digital communication and the increase in adoption. They all need to be protected against cyber-threats. It’s a huge market and is growing every day.

Crowdstrike trades now at 14x 2023 revenue forecast, which is a significant premium considering that SaaS companies as a whole trade around 10x 2023 revenue projection. However, it is worth noting that the implied revenue growth of Crowdstrike (roughly 70% vs. 20%) is higher.

Meanwhile, Cloudflare DatadogOther fast-growing businesses are worth looking at. They are still among the most costly software products, and it is best to hold off until after the Fed rates rise before adding them.

Euphoria reigns in the market for years. Slips and lumps were rare. Stocks wouldn’t be knocked off their feet by a pandemic that happened once in a lifetime.

However, the climate has changed. It is clear that the rally has ended, as evident in the beginning weeks of 2011. Still, opportunities will come — you just have to be patient and know when and where to pounce.  

 — By Andrew Graham, founder and managing partner of Jackson Square Capital