7 Hot Stocks From the Technology Sector

It's official: Economic growth slowed in the second quarter, according to the U.S. Department of Commerce. But while the overall pace of growth has declined, within the aggregate economy there are both bright spots and dull spots. Drilling down into the report's details, we find that business investment rose 17% in the quarter, with spending on equipment and software showing its strongest increase since the third quarter of 1997. It's no surprise businesses have been investing in technology, and tech company earnings have been roaring since this recovery began.

Businesses have begun to invest in technology first, because it increases efficiency and enables a company to increase production with fewer workers. That's important, as companies remain reluctant to hire in the face of economic uncertainty. What's more, according to Charles Schwab, companies put off upgrading systems during the recession, and real technology investment has been below average for several years. That's the kind of environment that fattens margins for both suppliers and buyers.

Intel (Nasdaq: INTC  ) serves as a perfect example of this. The company, a bellwether for the tech sector, recently reported its best quarter ever in its 42-year history. Revenue bolted 35% to $10.8 billion, while earnings swung from loss to profit in the same quarter last year on strong corporate demand for Intel's microprocessors. The company's chief says the PC and server markets are "healthy," and he expects demand for technology to "continue for the foreseeable future." Intel issued third-quarter sales above analysts' expectations.

In addition to profiting off the recovery domestically and globally, the sector is in the midst of a big wave of tailwind-creating innovation. Further, tech companies are tremendously well-capitalized, their coffers filled with cash, able to weather nearly any kind of credit storm -- which is important in the wake of a slowing recovery domestically and the European debt crisis. And as an added bonus, the tech sector isn't seeing the reregulation that the financial services and health-care sectors are currently experiencing.

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 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)

China Mobile (NYSE: CHL  )

22.7%

$204.4

1.4

*****

Cisco Systems (Nasdaq: CSCO  )

15.8%

$131.8

2.7

****

Corning (NYSE: GLW  )

17.2%

$28.2

4.7

*****

Qualcomm (Nasdaq: QCOM  )

16%

$61.1

2.2

****

Taiwan Semiconductor (NYSE: TSM  )

17%

$52.3

3.4

*****

Texas Instruments (NYSE: TXN  )

26.9%

$29.5

4

****

Source: Motley Fool CAPS. TTM = Trailing 12 months.

Points to ponder
Like any investing argument, this one comes with potential pitfalls. Uncertainty about the economic outlook and new policies out of Washington could retard business spending on technology. Still, tech companies derive a large portion of their sales overseas. That said, while the European debt crisis has calmed down for now, it's almost certain to flare again, although it hasn't hindered growth up to now. As long as global growth maintains a steady pace -- most likely buoyed by emerging market economies -- technology companies should perform well.

Risks aside, the prospects for the tech sector as a whole are bright. Valuations are also reasonable, especially since the market has sold off. Also, recent market volatility opens attractive entry points for investors ready to pounce. 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 all of those 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 does not own shares of any of the companies mentioned in this article. You can follow her on Twitter. Intel is a Motley Fool Inside Valuerecommendation. Charles Schwab is a Stock Advisor choice. The Fool owns shares of and has written puts on Intel. The Motley Fool owns shares of China Mobile and has a disclosure policy.


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