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Sector Rotation in Technology Could Disguise Underlying Strength

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On the other hand, most Technology stocks are doing quite well. In fact, over the past three months, 52 of the 70 Technology stocks in the S&P 500 have outperformed the 2% increase in the overall index. What's going on?

Quite simply, the Technology sector is experiencing a rotation within its leadership. For a great deal of 2012, one stock, Apple (AAPL), was advancing quite substantially. Because it is the biggest in the overall index and the sector, its impact masked overall weakness. The exact opposite is now playing out. While its weakness in the past few months isn't the only factor, as some larger stocks like Microsoft (MSFT) and Intel (INTC) have also dragged down the overall sector, the performance of the sector weighted by market capitalization has led many to wrongly conclude that Technology stocks aren't performing well.

In early November, I shared a screen of the Technology sector after the weak performance of the sector began, highlighting five names with good relative momentum within the sector despite the challenges. While the sector has remained under pressure, four of these five stocks advanced rather significantly. As I mentioned then, we are in a period of the year where Technology stocks tend to do well. With that in mind, I want to repeat the same screen using Baseline that I ran in early November to identity some stocks showing momentum. Here are some parameters similar to those I employed last time:

·       Member of S&P 500
·       Forward PE < 15X
·       2013 projected EPS growth > 10%
·       3-Month Price Return > 2%
·       6-Month Price Return > 8%

Here are the 7 that made the cut:

The companies that made the list aren’t recommendations. As always, you should do your own investigation before purchasing any stock.

I have sorted the list by one-year return, from lowest to highest. Two have declined over the past year, two have tracked the overall market, and three have advanced sharply. I have also included some additional information. First, note that 3 of the 7 have little or no net debt (shaded in green). I also highlighted one stock, Computer Sciences (CSC), that is perhaps a bit extended. Finally, note that 3 of the 7 trade below their 10-year median PE (shaded in green).

Don't be fooled by the cross-currents in Technology, as many large companies are performing poorly and disguising some underlying strength in the sector. In stark contrast to twelve years ago, Technology stocks are among the least expensive in the market. It is the largest sector in the market and offers some great attributes, including global exposure, growth, strong balance sheets, market dividends higher for many companies and reasonable valuations. The screen today is designed to identify some potential opportunities within the sector that offer a combination of favorable fundamental, valuation and technical characteristics.

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  Long INTC in models at Invest By Model

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