If you've read one headline, you've read them all. These days, everything from corporate profits to economic data spell doom and gloom. All stocks are subject to "systematic risk," or factors that affect the broader economy -- not company-specific factors. As a result, almost every company is a victim of the global recession. The good news is that while this recession is protracted, it won't last forever, and you need to position your portfolio for the future.
Technology may be a spot for future growth, and it could be the sector's turn to lead the next bull market. The tech sector has typically led the market out of past sell-offs. Semiconductors, for example, are cyclical and typically rally early in bull markets. As the market begins to stabilize and the economy comes back, the tech sector should get a boost as businesses increase spending on technology. Companies that have lost workers will most likely want to increase efficiency and can do so with technology.
According to Charles Schwab, as overall profit margins decline following a run-up, which has occurred recently, business investment in technology as a percentage of total spending has increased. Additionally, Schwab cites that as productivity growth slows, businesses have typically increased investment in software. Its research notes that business investment in technology is now outpacing growth in total business investment.
To uncover strong tech companies that will likely wade through this downturn and emerge even stronger, I put the CAPS screening tool to work. I screened for companies in the technology sector with:
- CAPS ratings of four or five stars, the highest ratings from our CAPS community. During the first 20 months for which we have data, four- and five-star companies have outperformed the market, with average annualized gains of 7% and 12%, respectively.
- A current ratio of 1 or greater to ensure liquidity.
- Minimum market cap of $200 million.
- Return on equity of 17% or greater.
- Minimum price of $5 per share.
- Revenue growth of 10% or greater over the last three years.
- Five or more Wall Street outperform ratings.
Here's what my screen turned up when I ran it. You can run it, too, but note that your results will likely differ as the data updates.
|
Company |
Market Cap (in billions) |
Current Ratio |
3-Yr Avg. Rev. Growth Rate |
Return on Equity (TTM) |
|---|---|---|---|---|
|
Adobe Systems |
$12.9 |
3.8 |
22.2% |
19.9% |
|
China Mobile |
$201.8 |
1.3 |
21.3% |
24.9% |
|
Cisco Systems |
$101.4 |
2.6 |
15.1% |
23.0% |
|
Hewlett-Packard |
$91.4 |
1.0 |
11.2% |
21.4% |
|
Infosys Technologies |
$15.4 |
4.9 |
29.6% |
35.3% |
|
Oracle |
$89.1 |
1.9 |
19.1% |
25.2% |
|
Qualcomm |
$58.8 |
5.1 |
24.5% |
17.6% |
|
Vasco Data Security International |
$0.31 |
3.6 |
36.5% |
26.5% |
Source: Motley Fool CAPS.
However, as with any investing argument, there are potential pitfalls. In many individual company cases, the tech sector's revenue streams come from overseas, and demand for everything, including technology, is down globally. Intel, for example, lowered its fourth-quarter revenue outlook by roughly 20% on weakening demand and inventory reductions by its customers in the global PC supply chain. But again, that is a result of sheer macroeconomics. However, if the economy worsens, that could prolong recovery, and as a result, expected increases in IT spending could be delayed.
When it comes down to it, remember that this is ultimately a short-term situation. Ask yourself now, is this company fundamentally strong? Is the stock price down because broader economic conditions are suppressing revenues? When the global economy turns, will this company's profits pick up? If you answer "yes" to those and similar questions, then you might just have a winner. Take advantage of valuations and solid balance sheets now because profitability will likely surface with recovery, and by then, the best buy-in prices will likely be behind us.
Use the Motley Fool CAPS screener and website as a first step in your investment research on technology stocks. Let the collective wisdom of our 125,000-member-strong investment community help you make better investing decisions.
Related Foolishness:
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