7 Stocks From the Technology Sector

Although unemployment remains high, the economy is recovering from its worst downturn since World War II. The market reflected the anticipated economic recovery last year, soaring 65% from its March 9 low, with the technology sector leading the way. After a choppy start to 2010, technology stocks have trended higher since mid-February.

While tech stocks have recovered from a shallow sell-off this year, technology companies' valuations still look appealing because of their revenue prospects as the economy recovers and businesses start to invest in technology. Some of the smartest investors around see value in the space now, too. "We continue to have exposure in technology," said Mary Chris Gay, co-manager with Bill Miller of the Legg Mason Value Trust index fund, in a recent Foolish interview. "We believe [technology is] among the best values."

If we drill down into the fundamentals, we find out why that value exists. Technology has bright prospects as we move into the next phase of global recovery. As businesses begin to regain confidence, many have begin to invest in technology first, since it increases efficiency and enables a company to increase production with fewer workers. That's the kind of environment that fattens margins for both suppliers and buyers. And it's especially attractive because corporations appear reluctant to hire, given the slow pace of the recovery.

According to Charles Schwab, current growth in business investment in technology is now outpacing growth in total business investment. Additionally, Schwab noted that companies put off upgrading systems during the recession, and that real tech investment has been below average for several years. Both conditions bode well for the future of 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. And that's finally beginning to happen.

Fourth-quarter GDP showed a 13.3% uptick in business capital spending -- most of which owed to investments in technology.

Oracle (Nasdaq: ORCL) serves as a tangible example. The software maker's revenue shot up 17% in its fiscal third quarter, the second straight quarter of top-line growth. What's more, Oracle forecasts a year-over-year 31% to 36% jump in revenue for the current quarter, even though that growth would include new revenue from the recently acquired Sun Microsystems. Revenue growth is a key indicator for the recovery of any company's operations from the downturn, because it signals customer demand.

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

To that end, I turned to the 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 greater, 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's what my screen turned up:

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

Like any investing argument, this one comes with potential pitfalls. It's important to make sure that valuations haven't pushed prices too far ahead of technology companies' individual financial prospects. This threshold will differ from company to company.

Additionally, a "double dip" in the economy, although unlikely, could shut off spending plans. Alternatively, a slow-growth scenario could temper investment. A strengthening dollar could have an effect as well, since many tech companies derive a substantial portion of their revenues abroad. Global competition, particularly from the Asian tigers, is a consideration as well. Will the global recovery remain intact, especially with structural issues that engulf the developed world -- particularly Europe?

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? 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 160,000 members can help you make better investing decisions.

For more tech Foolishness:

• These Tech Stocks Will Make Me Rich
• The Tech Investors' Handbook
• The Best Tech CEOs