5 Stocks From the Leading Sector of the Next Bull Market

While there are positive signs in recent economic data, all stocks are still subject to "systemic risk," or factors that affect the broader economy -- not company-specific factors. As a result, almost every company is a victim of the global recession.

The good news is that while this recession is protracted, it won't last forever, and you need to position your portfolio for the future.

Technology may be a spot for future growth, and it could be the sector's turn to lead the next bull market. The tech sector has typically led the market out of past sell-offs. Semiconductors, for example, are cyclical and typically rally early in bull markets. The tech-heavy Nasdaq has posted 12 straight days of gains and is up 55.6% since the March 9 low, and up 21% year to date.

As the market has stabilized and the economy comes back, the tech sector should get a boost as businesses increase spending on technology. Companies that have lost workers can increase efficiency with technology. Then once the economy does pick up, orders for technology, be it software, hardware, systems, or services, will pick up with economic growth.

Should we experience a "jobless recovery" in which business are slow to hire, technology could also fill the void of lost workers to maintain productivity.

To uncover strong tech companies that will likely wade through this downturn and emerge even stronger, I put the Motley Fool's CAPS screening tool to work. I screened for companies in the technology sector with:

  • CAPS ratings of four or five stars, the highest ratings from our CAPS community.
  • A current ratio of 1 or greater to ensure liquidity.
  • Minimum market cap of $200 million.
  • Return on equity of 15% or greater.
  • Minimum price of $5 per share.
  • Five or more Wall Street outperform ratings.

Here's what my screen turned up. You can run it, too, but note that your results will likely differ as the data updates.

Company

Market Cap
(in billions)

Current Ratio

Return on Equity
(TTM)

Wall Street Outperforms

Agilent Technologies (NYSE: A  )

$7.6

2.6

15.0

16

China Mobile (NYSE: CHL  )

$201.8

1.3

25.5

5

Cisco Systems

$126.3

3.2

19.0

35

Oracle

$111.2

2.0

22.3

22

Western Digital (NYSE: WDC  )

$6.7

2.1

16.3

19

Source: Motley Fool CAPS as of July 23, 2009. TTM = trailing 12 months.

As with any investing argument, there are potential pitfalls. Revenue streams for many tech companies come from overseas, and demand for everything is down globally. Businesses are delaying purchases, with spending expected to be on hold for sometime. Both IBM (NYSE: IBM  ) and Dell (Nasdaq: DELL  ) acknowledged this in their earnings reports last week.

When it comes down to it, remember that the current economic climate is a short-term situation. Ask yourself now, is this company fundamentally strong? Is the stock price down because broader economic conditions are suppressing revenues? When the global economy turns, will this company's profits pick up? If you answer "yes" to those and similar questions, then you might just have a winner.

Take Intel (Nasdaq: INTC  ) versus Dell as an example. Intel reported stronger second-quarter sales and profit margins than in the first quarter, as PC sales began to rebound for the company. Intel also lifted its revenue outlook for the current quarter, showing that the worst is behind for the largest supplier of computer chips.

Dell, on the other hand, struck the more cautionary note, stating global tech spending was weak and that it would run the business assuming continued weak demand. Remember Dell has been fighting an uphill battle since 2006, before the recession began, when it started losing share to Hewlett-Packard (NYSE: HPQ  ) . So it appears that Dell might be suffering from more than just the recession.

Take advantage of valuations and solid balance sheets now, because profitability will likely surface with recovery, and by then, the best buy-in prices will likely be behind us.

You can use the Motley Fool CAPS screener and the whole community-intelligence database as a first step in your investment research on technology stocks. Let the collective wisdom of our 135,000 members help you make better investing decisions.

Related Foolishness:

Jennifer Schonberger owns shares of Oracle, but does not own shares of any of the other companies mentioned in this article. Dell, Intel, and Microsoft are Motley Fool Inside Value selections. Apple is a Stock Advisor selection. The Motley Fool has a disclosure policy.


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