The technology sector has been lagging the overall market
since the spring of 2012. The sluggish relative
performance of the sector coupled with the movement of the
relative performance chart into support suggests that the tech
sector is worth exploring for investment opportunity. The
graphic following shows the Technology Sector ETF (
) verse the S&P 500 ETF (
The macro backdrop:
Technology sector also tends to trade well in the last part of
the year. The graphic shows the average monthly return of
the XLK and the average level of the XLK relative to January
going back to 2003. The value for January is
benchmarked to 1.00 on the left axis. Monthly returns are on the
right axis. On average, the technology sector seems weakest in
January, February, and June, but performs strongly in the spring
and firm into year end.
Although the U.S. economy is facing the headwind of higher
mortgage rates and fiscal uncertainty due to the debt ceiling
saga, purchasing managers surveys out of Europe and China are
hinting at a revival in global economic growth.
Europe and China have been areas of concern for the
business community. Business spending on equipment and
software could be positively impacted by the improving growth
Going into the end of the year, the technology sector may
benefit from year end budget flushing and holiday spending on the
consumer side. Company spending on productivity enhancing and
cost savings measures will likely be in fashion, while
electronics may be a strong pick the holiday season given the
availability of interesting smart phones and table products.
The technology sector does not have a strong correlation to
interest rates and is actually positively correlated to interest
rates - it tends to rise if rates rise. The ten year
correlation between the 10 year treasury yield and the price of
the XLK is +0.258. As a result, the impact of Fed taper on
the sector could be limited.
In order to look for opportunities in the technology sector, a
screen was set up to find fast growing technology companies at a
reasonable price. The screen consisted of three factors: 1)
A PEG ratio between 0.80 and 1.20. The PEG ratio measures the
price to earnings ratio relative to the growth rate in earnings.
A value of 1.0 suggests the PE ratio is equal to the growth
rate, while a value below 1.0 indicates that the PE ratio is
below the growth rate. Stocks with low PEG ratios are
usually seen as possessing value. 2) Earnings per share growth of
10% or more over the past three years. 3) Revenue growth of 10%
or more over the past three years.
Twelve stocks past the screen, but the screen was further
trimmed to include only Zacks Rank #1 (Strong Buy) stocks.
Two stocks emerged -
). Zacks Rank #1 stocks are companies that have
strong upward revisions to earnings estimates.
UBNT designs and produces wireless solutions. It
is a play on the need for wireless internet access globally. It
has a market cap of about $2.8 bln and a PEG ratio of 0.83, which
is near the ten year median value of 0.84. It is
expected to see EPS growth of 68.5% in FY 2014 (June) and 24% in
FY 2015. Sales are expected to grow 50.7% and 21.7% in FY
2014 and FY 2015 respectively.
SYNT is a provider of e-business services. It is
involved in customer relations management, data warehousing,
business intelligence, and enterprise application outsourcing. It
has a market cap of $3.1 bln. Its PEG ratio is 0.91
and it is expected to see EPS growth of 6.7%in 2013 and 5.2%
2014. EPS growth is expected to moderate from the historic pace
in the next near before accelerating to 16.6% in 2015.
Additionally, the PEG ratio is slightly below the longer term
median of 0.93. Sales are projected to rise 12.2% and
11.7% in 2013 and 2014 respectively.
A third possibility:
Another stock to look at is
), Zacks Rank #2 (Buy), which is a mobile security and
productivity company that is also a cloud play. The company
has duel corporate headquarters in Dallas Texas and Beijing, and
operates in the small cap space with a market cap of just below
$560 mln. Mobile security is finding more attention as the use of
smart phones rises and displaces the PC.
NQ is priced with a PEG ratio of 0.64. The company is expected
to see rapid growth in EPS in the coming two years. EPS are
projected to rise 138% in 2013 and 102% in 2014. Likewise,
sales are projected to be robust. Sales are estimated to
rise 101% in 2013 and 35% in 2014.
If you are looking for a recovery in a lagging market sector,
a market sector which is not overly sensitive to interest rates,
and stocks with strong growth at a reasonable price, UBNT, SYNT,
and NQ may be your plays. Take a look at these names and
see if you want to buy yourself a Christmas gift in August.
NETQIN MOBILE (NQ): Free Stock Analysis
SPDR-SP 500 TR (SPY): ETF Research Reports
SYNTEL INC (SYNT): Free Stock Analysis Report
UBIQUITI NETWRK (UBNT): Free Stock Analysis
SPDR-TECH SELS (XLK): ETF Research Reports
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