Banks Send Dow Down Again, But What's Pushing Big Tech Higher?

Even as everyone focuses on bank earnings reports, several tech stocks are defying the Dow's decline. Find out why.

Apr 11, 2014 at 11:00AM

After yesterday's 266-point plunge, investors had hoped that the Dow Jones Industrials (DJINDICES:^DJI) would get a positive bump from the beginning of bank earnings season. Those investors were disappointed, however, as the Dow's banking contingent got off on the wrong foot with results that sent bank stocks down across the board and sent the index itself down 36 points by 11 a.m. EDT. But several Dow stocks did manage to gain ground Friday morning, with most of them coming from the tech sector, including Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), and Cisco Systems (NASDAQ:CSCO).

Given the big drop in the Nasdaq during the most recent downturn, tech shares haven't been the friendliest place for investors over the past several days, so it's interesting to see these three stocks among the rare winners in the Dow on Friday. The most surprising of these rising stocks is Cisco Systems, which will have to deal with issues related to the recently discovered Heartbleed bug. Reports have surfaced that Heartbleed has been found in Cisco's networking products, including routers. That introduces a new dimension to the security threat, because it opens the possibility that hackers can obtain sensitive information not just from websites directly but also as information moves across the Internet.

But one thing that big technology names in the Dow Jones Industrials have right now is a reasonable valuation. Even though high-flying social-media and biotechnology names have played a big role in pulling the Nasdaq down lately, Cisco, Microsoft, and IBM all have below-market earnings multiples.

For some investors, those low valuations reflect the relative lack of growth prospects that those three big tech stocks have. But many investors are more bullish on their longer-term potential. For Microsoft, new leadership in the executive suite has inspired the company to move in new directions in order to tap the full potential of cloud computing, with the company admitting that it needs to stop trying to build a vertically integrated environment and instead enable those using other hardware platforms to use its software products. Similarly, IBM hopes to use the vast potential of data analytics to meet its enterprise customers' needs, giving them useful information that they can then use to make the most of their business opportunities. And even though Cisco Systems has struggled to find its way forward while defending its position in networking, the rise of the Internet of Things has some shareholders excited about its future.

Today's rise in tech stocks points to a longer-term awareness of these stocks' potential, as well as the value proposition they offer. That might not keep them from falling in a broader correction, but it still makes them interesting plays for those seeking a margin of safety in a shaky market.


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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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