7 Stocks From This Year's Leading Sector

The recession is technically over, and the economy is beginning to recover from its worst downturn since World War II. As the market rises, it looks like the technology sector -- which plunged following the bursting of the tech bubble in 2001 -- has finally made a solid comeback from hibernation.

If we drill down into the fundamentals, we find good reason for this outperformance. Technology has nice prospects as we move into the next phase of global recovery. As businesses regain confidence, technology will likely be one of the first areas of investment for corporations. Think about it: Technology increases efficiency and enables a company to produce more with fewer workers, which fattens margins for both suppliers and buyers.

According to Charles Schwab, current growth in business investment in technology is now outpacing growth in total business investment. A study from CFO magazine and Duke University shows that companies are more disposed to spending on technology than they were three months ago; U.S. CFOs intend to begin boosting spending on technology by 0.1% next year. Though this may seem paltry on the surface, it compares with a 0.4% decrease in September and a 4.6% decline in May.

Additionally, according to Charles Schwab, companies have put off upgrading systems during this recession and real tech investment has been below average for several years, both of which bode well for the sector. The recession also led companies to hoard cash on their balance sheets and slash expenditures. Thus, they’ll be poised to begin fattening up their profit margins once sales kick in -- which may not be that far off.

Certain companies within the technology arena are already beginning to show top-line growth. Tech bellwether Intel posted a sales increase in the third quarter, on an uptick in demand for chips for laptops and netbook computers. Best of all, the company said the sales increase wasn't simply because of an inventory bump, but instead represented the beginning of a real increase in demand. Let’s see if things have improved further when the company reports fourth-quarter earnings on Jan. 14.

Oracle (NASDAQ:ORCL), a leading supplier of software to businesses and thus a bellwether of tech spending, reported a strong fiscal second quarter (ending Nov. 30) earlier this month. The report gave hope for business spending on technology. Earnings rose as revenues rose 4% and the company stole share from competitors. The world’s second-largest software provider reported that new software license revenue began to tick up with a gain of 2% in the quarter, following multiple quarters of depressed sales thanks to the recession.

Given these improving conditions, investors should strongly consider adding exposure to technology in their portfolios.

To that end, I turned to the CAPS screening tool to uncover strong tech companies potentially poised to take off. 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 greater, meaning the companies would be able to cover their near-term obligations at least one time over.
• Minimum market cap of $200 million.
• Return on equity of 15% or greater.

Here's what my screen turned up:

Source: Motley Fool CAPS as of Dec. 30. TTM = trailing 12 months.

Like any investing argument, this one comes with potential pitfalls. The broad stock market, as measured by the S&P 500, has risen a whopping 66% from its lows this year, while the tech-heavy Nasdaq has risen an even more impressive 81%. As such, it’s important to make sure that valuations haven't pushed prices too far ahead of technology companies' individual financial prospects.

Additionally, a "double dip" in the economy -- though unlikely -- could shut off spending plans. A strengthening dollar could have an effect as well, as many tech companies derive a substantial portion of their revenues abroad. Global competition, particularly from the Asian Tigers, is a consideration as well.

Inflated P/Es and 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? Are broader economic conditions the only thing suppressing revenue? As the global economy turns, will this company's profit pick up? 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 145,000 members can help you make better investing decisions.