Tech Looks Good

9/6/2010


Nine of the 33 recommended stocks on the Buy List or Long-Term Buy List are technology companies — the most of any sector. Our fondness for tech is no accident.

Compared to other sectors, technology companies offer a particularly compelling combination of improved Quadrix® scores, strong profit-growth prospects, and attractive valuations. Consider the following:

Solid average Quadrix scores. The average S&P 1500 technology stock earns an Overall score of 62 — the highest level since August 2008 and up from 51 at the start of the year. The sector’s 10-year average Overall score is also 51.

Lots of Quadrix standouts. With 718 stocks, technology has the second-largest representation in our research universe of more than 4,000 stocks, trailing only financials (863). Nearly one-quarter of technology companies earn Overall scores above 80. Importantly, of the 409 stocks with Overall scores above 90, 97 are technology firms — tops among the 10 sectors.

Reasonable valuations. At 23 times trailing earnings, the average tech stock trades at a discount to its five-year average P/E ratio of 25. Based on estimated current-year earnings, tech stocks have rarely been cheaper. The P/E ratio based on estimated year-ahead earnings is 16, well below the five-year average of 22. The Value score of 53 is the highest since late 2008.

Strong earnings momentum. Despite a somewhat tenuous backdrop for technology spending, the average tech company in the S&P 1500 is expected to deliver 30% per-share-profit growth this year and 22% next year. Nearly 80% of tech firms are expected to post higher earnings this year, while 93% are forecast to grow in 2011.

For new buying, two especially attractive technology names include Microsoft ($23; MSFT), reviewed in Analysts' Choice, and IBM ($123; IBM). IBM seems unduly cheap given its growth outlook and substantial free cash flow. The consensus projects per-share profit growth of 13% this year and 10% in 2011, and estimates are rising. Over the next five years, per-share earnings are expected to increase at an 11% annualized clip. At the end of June, trailing 12-month free cash flow from operations was $2.11 billion, or nearly $10 per share.

The Quadrix Value score of 69 is much better than the industry-group average of 51. Based on trailing earnings and the five-year average P/E of 14.5, the stock’s implied price target is around $150, up 22%. Based on peer-group average P/Es, the stock seems worth $160. In our view, the shares seem capable of reaching $145 over the next 12 months. IBM is a Focus List Buy and a Long-Term Buy.

9 TOP TECHNOLOGY PICKS
—— Quadrix Overall Scores * ——
—— Current Year ——
——— Next Year ———
Company (Price; Ticker)
Company
Industry
Average
Rank In Industry
(No. of Cos.)
Est.
EPS
($)
Est.
Chg.
(%)
Est.
P/E
Est.
EPS
($)
Est.
Chg.
(%)
Est.
P/E
Industry
Apple ($243; AAPL)
96
42
1
(12)
14.44
59
17
17.48
21
14
Computer Hardware
BMC Software
($36; BMC)
72
49
9
(35)
2.85
7
13
3.09
8
12
Systems Software
Hewlett-Packard
($38; HPQ)
85
42
2
(12)
4.50
17
9
4.99
11
8
Computer Hardware
IBM ($123; IBM)
82
54
6
(41)
11.29
13
11
12.36
9
10
Tech. Consulting 
Intel ($18; INTC)
97
67
11
(94)
1.96
155
9
1.94
-1
9
Semiconductors
Microsoft ($23; MSFT)
94
49
1
(35)
2.36
12
10
2.63
11
9
Systems Software
Oracle ($22; ORCL)
81
49
4
(35)
1.90
14
11
2.10
11
10
Systems Software
Research In Motion
($43; RIMM)
97
51
4
(95)
5.54
26
8
5.94
7
7
Telecom Equipment
Texas Instruments
($23; TXN)
99
67
3
(94)
2.48
116
9
2.58
4
9
Semiconductors
* Quadrix scores are percentile ranks, with 100 the best. Industry ranks are based on our entire research universe of more than 4,000 stocks.

 


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