Good news, folks. The economy is beginning to stabilize, and companies with business clientele are optimistic that corporate spending will pick up next year.
Some analysts project that business spending on software and equipment finally rose in the third quarter, following six consecutive quarters of declines, according to The Wall Street Journal. Technology, in particular, may be the first sector to clock positive growth in corporate expenditures.
During the recession, companies have hoarded cash on their balance sheets and slashed expenditures. Those measures leave them poised to begin fattening up their profit margins once sales kick in -- which may not be that far off. Advanced Micro Devices (NYSE: AMD ) says it expects technology purchases to increase starting next year, after nearly halting during the recession. The falling dollar could also aid companies' bottom lines, since many technology companies generate a large portion of their revenue abroad.
Certain companies within the technology arena are already beginning to show top-line growth. Tech bellwether Intel (Nasdaq: INTC ) posted a sales increase in the third quarter, on an uptick in demand for chips for laptops and netbook computers. Best of all, the company said the sales increase wasn't due simply to an inventory bump, but instead represented the beginning of a real increase in demand.
As these trends become more pronounced, the tech sector's fundamentals will strengthen, and its stock prices should, too. Given these improving conditions, investors might want to add a little exposure to technology in their portfolios.
I turned to the CAPS screening tool to uncover strong tech companies potentially poised to take off following this downturn. My search criteria included:
- 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; just remember that your results will likely differ as the data updates:
|
Company
|
Market Cap
|
Current Ratio
|
Return on Equity (TTM)
|
CAPS Rating
|
|
Check Point Software Technologies (Nasdaq: CHKP )
|
$6.3 billion
|
2.6
|
15.0
|
****
|
|
Cisco Systems (Nasdaq: CSCO )
|
$138.8 billion
|
3.2
|
15.9
|
****
|
|
Infosys Technologies (Nasdaq: INFY )
|
$27.3 billion
|
5.7
|
31.0
|
****
|
|
Oracle (Nasdaq: ORCL )
|
$110.4 billion
|
2.7
|
21.6
|
****
|
|
Vasco Data Security (Nasdaq: VDSI )
|
$274 million
|
4.9
|
17.3
|
*****
|
Source: Motley Fool CAPS as of Oct. 21. TTM = trailing 12 months.
Like any investing argument, this one comes with potential pitfalls. The entire stock market has risen a whopping 60% from its lows this year, and the tech sector has been no exception. Make sure that valuations haven't pushed prices too far ahead of technology companies' individual financial prospects.
Inflated P/Es aside, the prospects for the tech sector as a whole are bright. When considering a technology company, ask yourself: Is this company fundamentally strong? Are broader economic conditions the only thing suppressing revenue? When the global economy turns, will this company's profit pick up? If you answer "yes" to those and similar questions, you might just have a winner.
Use the Motley Fool CAPS screener and our entire community-intelligence database as a first step in your investment research on technology stocks. The collective wisdom of our 140,000 members can help you make better investing decisions.
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