The tech sector has left some proverbial eggs for many investors. And, if the early earnings results are any indication of what's to come over the remainder of earnings season, then technology stocks are setting up for a surprisingly rewarding summer.
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Tech Earnings Rock!
Two of technology's icons have already posted Q1 results, and both of them delivered.
International Business Machines Corp. (NYSE:IBM) got the party started by topping Q1 earnings-per-share estimates of $2.30 with an actual operating profit of $2.41 per share. Intel (Nasdaq:INTC) followed suit by posting a per-share operating profit of 59 cents, handily topping the estimate of 46 cents. Both companies beat last year's comparable income, and both shared an optimistic vision about the remainder of 2011.
It's not just hardware, consulting and corporate service that fueled earnings surprises. Yahoo (Nasdaq:YHOO), which ultimately derives revenue from retail consumers' search activity, also aced last quarter's expectations. Its profits per-share fell from 22 cents to 19 cents last quarter, but that still exceeded estimates of 16 cents. More importantly, display ad revenue was up 10% for the quarter, to $471 million - a sign that the organization is back on track after stumbling a bit with the Microsoft (Nasdaq:MSFT) search integration.
VMware (NYSE:VMW), a software and cloud services provider, got into the act as well. It pushed its quarterly per-share operating income up 60% to 48 cents, versus expectations of only 42 cents. The company managed to sweeten the pot by raising its 2011 revenue forecast to about 3% above prior analyst expectations.
Seeing all of the names in this diversified group soar suggests that there's a undercurrent pushing the bulk of the sector in the same direction.
While the strength of these success stories isn't a complete shock, it is odd that so many investors decided to shed tech names in front of what's been a very good earnings trend so far for the sector. Specifically, the year-to-date performance of the sector - using the Technology Select Sector SPDR (NYSE:XLK) as a proxy - is among the worst of the worst. In fact, its YTD gain of 1% (versus the market's average of 4%) makes the tech sector the second-worst performing group for the year; the financials are only at a breakeven since the end of last year.
And just for the record, this weakness is nothing new. The tech fund has been a laggard since mid-February, indicating traders have seen a better risk/reward ratio with most other groups for quit some time. That risk/reward scenario changed dramatically on Tuesday though, with four companies knocking it out of the park.
It's an attractive scenario to be sure - stocks that were not only beaten down to excess, but now have proven to be anything but liabilities. While the "sell in May and go away" suggestion looks like it's trying to materialize this year on a market wide scale, the technology sector may be an exception to that lull because these names have a lot of ground to make up based on strong earnings results to far.
Though all the stocks mentioned above have jumped out of reach for most investors, there's a bigger universal theme here that applies to other picks in the now-compelling sector. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. Check out How To Pick A Stock.)
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