4 Reasons To Buy Tech Stocks

By James Brumley | August 16, 2010 AAA

Last week was a tough one for investors. Stocks did poorly (to say the least), on the heels of a pseudo-admission from Bernanke & Co. that the recovery was falling asleep again. That's why we're seeing the quantitative easing now, even if it's a diet version. (To learn more, see Ben Bernanke: Background And Philosophy.)
Of course, the inflation/deflation argument got thrown into the blender. Or, perhaps it was the inflation discussion that turned the blender on. Either way, stocks got chopped and pureed, as did investor confidence.

Before deciding to give up on stocks for good though, can I make an appeal to investors' rational side?

Here it goes: While I have little doubt that plenty of stocks will disappoint in the coming six or so quarters, on the flip side, I have little doubt that some groups will be surprising beacons, with rising stocks and strong underlying numbers. One of those groups is technology.

Before you laugh, consider four pieces of evidence.

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1. Margins Are Better Than Expected
Analysts simply underestimated how profitable the tech sector would be in Q2. Rather than clearing the expected net margin of 7.8%, the average tech stock actually saw a margin of 18.3%. One has to wonder if the current projected numbers are also underestimated, and if margins are heading back to their glory days.

Sandisk (Nasdaq:SNDK) is a great example. Last quarter's net profit margin was 21%, thanks to per-share earnings of $1.08. The experts were only expecting 90 cents, but it was the fourth time in a row they guessed well short of the actual number.

Were it just Sandisk, the surprisingly wide margins might be dismissable, but it's not just Sandisk. And the wider the margin, the more protected the profit.

2. Sequential Earnings Growth
Let's face it - comparing any part of 2010 to the equivalent period of 2009 is a bit of a joke. If the recovery is real, we should see sales and earnings grow sequentially as well. Well, tech did just that in the second quarter. The 12.8% increase in earnings tech saw for the periods is among the top of all sectors.

3. More Year-Over-Year "Beats" In Q2 Than Any Other Sector
While meeting or beating analyst estimates is important, there is always the off chance that the analysts were just wrong. As such, I'm just as interested in whether a sector has topped its year-over-year comparison.

Tech has; in fact, the tech stocks in the S&P 500 saw more year-over-year beats in terms of revenue than any other group did in the second quarter.

That kind of detail really puts a company like Advanced Micro Devices (NYSE:AMD) in perspective. The semiconductor stock's been getting hammered since April, with the latest beating coming after a pessimistic view of the PC market was posted on Tuesday. "Falling off a cliff" was the phrase used. Ouch. The thing is, AMD had already reported a 31% increase in year-over-year sales for Q2, in defiance of the reported slow-down on PC orders.

4. Inflation? Deflation? Doesn't Matter
It's kind of funny how almost every sector falls on different sides of the fence when debating whether it's inflation or deflation that's looming. Tech falls on the bullish side of the fence either way.

How does that work? Although it wasn't this way 10 or more years ago, tech stocks have almost become the new consumer staple - particularly to corporations that rely heavily on technology to run their businesses. Take Oracle (Nasdaq:ORCL), a database and software manager for some of the world's biggest corporations, for example. Like it or not, Oracle is ingrained in the day-to-day operations of said businesses - so much so that these companies couldn't shed those services even if they wanted to. Poof: recurring revenue that's going to be generated regardless of the inflationary environment.

Cisco (Nasdaq:CSCO) is the antithesis; it makes networking equipment, which can be subject to a "take it or leave it" mentality (and it was "leave it" in the most recent quarter).

The Final Word
To be fair, I don't want to imply that all tech names are bulletproof no matter what the economy throws our way. They're not. For that reason, a broad-based play like the iShares U.S. Technology ETF (NYSE:IYW) or the Semiconductor HOLDRs (NYSE:SMH) might end up yielding mediocre results.

Rather, this is a scenario where recurring revenue services, or even manufacturers of hardware, are treated like consumables and continue to move forward. The overall Q2 results combined with the new indispensable nature of technology actually paint a compelling picture right now - and a much brighter one than most other sectors as well. (To learn more about the tech sector, see Technology Sector Funds).

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