Free Annual Reports
Technology's Perfect Storm
The market may be efficient, but that doesn't mean it's rational. The collective "market" may be perfectly aware of all relevant information there is to know about a company at any point in time (per the efficient market theory), but investors may not actually know what to do with the information.
That's where opportunities get put back on your plate. In fact, some really good ones came to light in the shadow if the first quarter's earnings scoreboard.
IN PICTURES: 6 Ways To Save Money This Summer
At The Top
Care to guess which sector's S&P 500 stocks saw the second-greatest proportion of positive surprises? The tech sector did, posting 89%. Consumer discretionary won that race, with 93% of its names topping estimates.
Now, care to guess which sector saw the fourth-best (of ten) earnings growth last quarter, and the third-best sales growth? Again, it was the technology sector, with an improvement of 65% and 18%, respectively. (Learn more about sector investing, see: Sector Rotation: The Essentials.)
And which sector is actually underperforming the S&P 500 year-to-date, despite boasting the relative fiscal performances mentioned above? Tech, tech and tech.
Given how distrustful investors seem to still be regarding the technology sector - and the doubts about the recovery that is supporting its re-emergence - it seems the "efficient market" has built a wall of worry for the group to climb up. The actual numbers say the group is well on the mend.
As such, this is something of a perfect storm: companies that are growing the top and bottom line, and a slew of investors who just refuse to see it. Once they finally accept it though, look out.
Picks of the Litter
While relying solely on a stock screener (which can miss minor details that are actually important factors) isn't wise, a screener can be used to narrow my field down to stocks with low valuations and high-growth trends. After that, I took a closer look. Here are the investment-worthy survivors.
SanDisk Corp. (Nasdaq:SNDK) has topped EPS estimates in all four of its most recent quarters. More interesting is that fact that 2011's earnings estimates are still under 2010's partially adjusted estimates, so the forward-looking P/E of 13.1 - as cheap as it is - is still not optimistic enough.
Disappointment can be a relative thing. Take NetEase (Nasdaq:NTES) for instance. The Chinese online gaming company saw an "only" 8.5% increase in earnings last quarter; Q2 wasn't looking much better. The trailing twelve-month P/E is now a hefty 14.7, and profit margins have been whittled down to a pitiful 45%.
Netease's worst is a pipedream for most other companies. Besides, while the second quarter may well be soft, the release of a few expansion packs in the third quarter should get these numbers back up to salivating levels.
Corning Inc. (NYSE:GLW) not only sailed through the recession relatively unscathed and was profitable in every quarter since Q1 of 2008, but also beat estimates in each of its last four quarters. Yet, the stock's trading at an earnings multiple of less than 10.
And finally, a somewhat uncreative tech pick, Google (Nasdaq:GOOG). It's not that the tech giant is completely bulletproof, but if I had to pick one stock to own long-term, GOOG would be it. Plus, the 20% pullback since the beginning of the year presents a window of opportunity.
The Bottom Line
These are four solid ideas from a sector that's looking undervalued and ripe for run.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
That's where opportunities get put back on your plate. In fact, some really good ones came to light in the shadow if the first quarter's earnings scoreboard.
IN PICTURES: 6 Ways To Save Money This Summer
At The Top
Care to guess which sector's S&P 500 stocks saw the second-greatest proportion of positive surprises? The tech sector did, posting 89%. Consumer discretionary won that race, with 93% of its names topping estimates.
Now, care to guess which sector saw the fourth-best (of ten) earnings growth last quarter, and the third-best sales growth? Again, it was the technology sector, with an improvement of 65% and 18%, respectively. (Learn more about sector investing, see: Sector Rotation: The Essentials.)
And which sector is actually underperforming the S&P 500 year-to-date, despite boasting the relative fiscal performances mentioned above? Tech, tech and tech.
Given how distrustful investors seem to still be regarding the technology sector - and the doubts about the recovery that is supporting its re-emergence - it seems the "efficient market" has built a wall of worry for the group to climb up. The actual numbers say the group is well on the mend.
As such, this is something of a perfect storm: companies that are growing the top and bottom line, and a slew of investors who just refuse to see it. Once they finally accept it though, look out.
While relying solely on a stock screener (which can miss minor details that are actually important factors) isn't wise, a screener can be used to narrow my field down to stocks with low valuations and high-growth trends. After that, I took a closer look. Here are the investment-worthy survivors.
SanDisk Corp. (Nasdaq:SNDK) has topped EPS estimates in all four of its most recent quarters. More interesting is that fact that 2011's earnings estimates are still under 2010's partially adjusted estimates, so the forward-looking P/E of 13.1 - as cheap as it is - is still not optimistic enough.
Disappointment can be a relative thing. Take NetEase (Nasdaq:NTES) for instance. The Chinese online gaming company saw an "only" 8.5% increase in earnings last quarter; Q2 wasn't looking much better. The trailing twelve-month P/E is now a hefty 14.7, and profit margins have been whittled down to a pitiful 45%.
Netease's worst is a pipedream for most other companies. Besides, while the second quarter may well be soft, the release of a few expansion packs in the third quarter should get these numbers back up to salivating levels.
Corning Inc. (NYSE:GLW) not only sailed through the recession relatively unscathed and was profitable in every quarter since Q1 of 2008, but also beat estimates in each of its last four quarters. Yet, the stock's trading at an earnings multiple of less than 10.
And finally, a somewhat uncreative tech pick, Google (Nasdaq:GOOG). It's not that the tech giant is completely bulletproof, but if I had to pick one stock to own long-term, GOOG would be it. Plus, the 20% pullback since the beginning of the year presents a window of opportunity.
The Bottom Line
These are four solid ideas from a sector that's looking undervalued and ripe for run.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
Free Annual Reports
