7 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.

Oracle (Nasdaq: ORCL  ) serves as tangible evidence for the sector. The world's third largest software maker saw revenue in its fiscal fourth quarter shoot up 39%, to $9.5 billion, as businesses continue to rev up spending on technology and as the company benefited from its recent acquisition of Sun Microsystems. New software sales, an indicator of business confidence, rose 14% in the quarter. The technology juggernaut also said Europe would not impede its recovering operations.

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 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 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 seven companies that passed the test and deserve further research:

Company Name

Return on Equity (TTM)

Market Cap

Current Ratio

CAPS Rating
(out of 5)

China Information Security Technology (Nasdaq: CPBY  )

19.1%

$268.9 million

2.2

****

Cisco Systems (Nasdaq: CSCO  )

15.8%

$120.7 billion

2.7

****

Infosys Technologies (Nasdaq: INFY  )

24.5%

$34.0 billion

6.6

*****

International Business Machines (NYSE: IBM  )

62.3%

$156.3 billion

1.3

****

Oracle

19.9%

$109.7 billion

1.7

****

Quality Systems (Nasdaq: QSII  )

25.7%

$1.6 billion

2.2

*****

Synaptics (Nasdaq: SYNA  )

18.5%

$938.0 million

3.4

****

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, especially since the market has sold off.

Points to ponder
Like any investing argument, this one comes with potential pitfalls. 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. More specifically, if Europe caused a slowdown in the global economy then corporations could hold off on buying more technology.

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. Quality Systems and Charles Schwab are Motley Fool Stock Advisor selections. The Motley Fool owns shares of Oracle and has a disclosure policy.


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