6 Stocks From the Technology Sector

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.

As business begins 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. What's more, according to Charles Schwab, companies put off upgrading systems during the recession, and real tech investment has been below average for several years. That's the kind of environment that fattens margins for both suppliers and buyers.

Hewlett-Packard (NYSE: HPQ  ) serves as tangible evidence. The technology juggernaut's business is gaining momentum as it rides the corporate spending wave. Net revenue rose 13% in its fiscal second quarter. Sales growth in its printing unit – which account for one-fifth of its business -- increased two-fold, from 4% to 8%, from the company's first fiscal quarter. Sales from Europe surprisingly sprung back. HP raised its full-year outlook on account of strong demand for its PCs and servers and a rebound in its printer businesses.

In addition to profiting off the recovery domestically and globally, the tech sector is in the midst of a big wave of innovation that creates a tailwind. Further, tech companies are tremendously well- capitalized. Many have coffers filled with cash, and can weather nearly any kind of credit storm, which is important in the wake of the European debt situation. Plus, the tech sector isn't being reregulated like the financial services and health care sectors.

Given these 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
(out of 5)

Cisco Systems (Nasdaq: CSCO  )

15.8%

$133.3

2.7

****

Corning (NYSE: GLW  )

17.2%

$26.3

4.7

*****

IBM (NYSE: IBM  )

62.3%

$163.4

1.3

****

Oracle (Nasdaq: ORCL  )

19.9%

$113.6

1.7

****

Qualcomm (Nasdaq: QCOM  )

15.2%

$59.1

3.8

****

Texas Instruments (NYSE: TXN  )

21.5%

$30.3

3.7

****

Source: Motley Fool CAPS as of June 2. TTM = Trailing 12 months.

I picked these companies because each has a strong business that operates in a good niche in the markets each serves. All are seeing strong demand from their end markets, as they benefit from the comeback in corporate demand for technology. Additionally, all are financially healthy with lots of cash and good balance sheets. Valuations are also reasonable, with valuation on Corning particularly enticing.

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. Also we have yet to see if the European debt crisis will hinder global economic growth. Since many technology companies derive a large portion of their sales from overseas, any material slowdown in Europe could impact sales.

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 165,000 members can help you make better decisions.

For more tech Foolishness:

Fool contributor Jennifer Schonberger owns shares of Oracle, but does not own shares of any of the other companies mentioned in this article. You can follow her on Twitter.

Charles Schwab is a Motley Fool Stock Advisor recommendation. The Motley Fool owns shares of and has written puts on Oracle. The Fool has a disclosure policy.


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