Although unemployment remains high, the economy continues to recover from its worst downturn since World War II. Look no further than tech earnings to see that it is one sector that appears to have recovered from a long slump following the notorious bubble in 2001.
IBM serves as tangible evidence. The company reported strong first-quarter earnings and raised its outlook for the year. The strong quarter was owed to an 11% increase in software sales -- the company's most profitable area and therefore a key sign of health for IBM's business. Also, the systems and risk unit returned to revenue growth in the first quarter, and IBM expects growth in that unit to "accelerate" as the year progresses.
Technology has bright prospects as the global recovery takes flight. As businesses begin to regain confidence, many have begun to invest in technology first, because it increases efficiency and enables a company to increase production with fewer workers. That's the kind of environment that fattens margins for both suppliers and buyers.
According to Charles Schwab, growth in business investment in technology is now outpacing growth in total business investment. Also, Schwab noted that companies put off upgrading systems during the recession, and that real tech investment has been below average for several years. Both conditions bode well for the sector. The recession also led companies to hoard cash on their balance sheets and slash spending. Thus, they're poised to begin fattening up their profit margins now that sales are kicking back in.
Given these improving conditions, investors should consider adding exposure to technology in their portfolios.
To that end, I turned to the Motley Fool CAPS screening tool to uncover strong tech companies. I screened for companies with:
- CAPS ratings of four or five stars, the highest ratings from our CAPS community.
- A current ratio of 1 or more, meaning the companies would be able to cover their near-term obligations at least one time over.
- A minimum market cap of $200 million.
- Return on equity of 15% or greater.
Here are six companies that passed the test and deserve further research:
|
Company |
Return on Equity (TTM) |
Market Cap (in billions) |
Current Ratio |
CAPS Rating
|
|---|---|---|---|---|
|
Cellcom Israel |
316% |
$3.07 |
1.7 |
**** |
|
ClickSoftware Technologies |
29.3% |
$0.20 |
3.1 |
***** |
|
Infosys Technologies |
26.8% |
$34.45 |
5.9 |
**** |
|
Quality Systems |
26.9% |
$1.86 |
2.3 |
***** |
|
Sapient |
20.7% |
$1.38 |
2.9 |
**** |
|
Synaptics |
18.4% |
$1.06 |
2.9 |
**** |
Source: Motley Fool CAPS as of April 28. TTM = trailing 12 months.
Here's a bit of rationale behind the companies I've chosen:
In short, each had a great characteristic that piqued my curiosity.
Analysts expect Sapient and ClickSoftware to post strong sales growth of 21.3% and 18.9%, respectively, this year. Hopefully, strong sales will convert to bottom-line growth.
Quality Systems, which markets health-care information systems and offers electronic medical systems software, operates in a great space, considering the health-care bill will require that medical records be made electronic. Already, analysts project the company will post revenue growth of 18.9% for the fiscal year ended March 2010 and 20.6% for the March 2011 one.
Cellcom offers a juicy dividend yield of 8.7% (rare for a small tech company). The stock trades around $30 per share, yet the low target is $33 for the stock and the high target is $152.60. Clearly there's a large range of opinion, and it's your job to find out what one analyst knows that the other doesn't to determine who's right.
Pointers to remember
Like any investing argument, this one comes with potential pitfalls. It's important to make sure that valuations haven't pushed prices too far ahead of technology companies' individual prospects. This threshold will differ from company to company.
Risks aside, the prospects for the tech sector as a whole are bright. When considering a technology company, ask yourself: Is this company fundamentally strong? Is the company well-positioned in the marketplace? Is it picking up market share? 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 160,000 members can help you make better decisions.
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