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Don't Bet Against Tech: Here Are 5 Stocks to Smile About

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The technology sector has been falling out of favor recently, what with the stronger dollar, weak PC market, Asian companies making their entry and increased regulatory scrutiny in Europe and China. To further add to the noise, activist investors have started playing a bigger role.

Taking a closer look at that list, we see that the stronger dollar is not a tech-specific factor and all companies with extensive international businesses would be hit. Okay, tech would be hit a bit more because the international segment is large and growing.

Second, PC market woes may continue because the market is mature and international opportunities are primarily coming from price-sensitive regions. But those companies exposed to PCs are increasingly diversifying away from it to mobile, IoT and the cloud. This transition wont be smooth or easy, but it's definitely on, which offers many opportunities.

Third, Asian companies are also getting bigger, especially in the hardware segment. The Chinese government is intensely focused on building its own technologies and given the U.S. government's history of surveillance, they are increasingly cutting self-serving deals with U.S. tech companies. But the approach is more collaborative than in the past, which is actually positive for tech companies.

Finally, the EU is getting more vigilant about data transfer and privacy issues and it is also seeking to strengthen European companies. This promises to be a long-term headache for U.S. tech firms, but one they are likely to learn to live with.

On a positive note, the U.S. and EU have come to an understanding about a new law for data transfer between them to replace the Safe Harbor law. While details aren't available yet, press reports indicate that it isn't too negative for American companies.

Apple's encounter with the FBI wherein the FBI is asking it to hack into a user's phone will set the tone for similar cases in the future. The government is asking for help to fight terrorists, but the practical problems of doing this are first, that it would undermine the security of the device with negative implications for the maker and second, that it would make the governments of other countries even more suspicious of American tech companies thereby making it very hard for them to do business abroad. That's the reason all the who's who of tech are siding with Apple.

Naturally, all of the above aren't telling on company fundamentals, something we should take into consideration when looking for the right stocks.

According to the latest Zacks Earnings Trends Report dated Mar 1, it is evident that the sector did significantly better than the average company in the S&P 500. Tech sector earnings dropped 1.2% on a revenue decline of 2.1% compared with the S&P 500's 6.4% earnings decline on revenue that declined 4.6%.

Revenue and earnings declines aren't positive for any sector, but the 4-quarter average growth for the technology sector is also significantly higher than the S&P 500. Plus, when you x out the significant impact of currency, it shows that growth trends remain positive. And this is exactly what we have seen in our detailed earnings analyses for the quarter.

Note that the technology sector net margins are also higher than every other sector in the S&P 500.

Zacks Industry Rank

This leads us to an examination of the Zacks Industry Rank, which is basically the average rank of the stocks in the industry. Therefore, if technology stocks are really what your money should be in now, they should be in industries with high Zacks Industry Ranks (#1 to #88).

This is where all the positive estimate revisions are taking place, not just for the individual stocks but also broadly across the industry. So it's an indication that there are positive factors influencing the industry.

There are a number of technology industries with top ranks, from which I have picked out a motley crowd that can help you maximize the return on your investment.

Applied Materials AMAT

Zacks Rank #1

Zacks Industry Rank #25

Current quarter estimate revision +9.48%

Current year estimate revision +10.00%

Applied Materials is the largest of these companies; in fact it is one of the largest semiconductor equipment makers in the world. While semiconductor equipment and services constitute the bulk of its business, it also sells some equipment for TFT LCDs and OLED displays and an even smaller number for solar cell manufacturing.

The company did better than expected in the last quarter. Management said that Applied now serves 60% of the total wafer fab equipment market and that its served market may be expected to increase by more than 40% as the industry transitions to 3D NAND. Foundry spending, 10nm and FinFET are also expected to pick up toward the end of the year. Another positive is the fact that they are seeing increasing spending in China.

Brocade Communications Systems BRCD

Zacks Rank #1

Zacks Industry Rank #21

Current quarter estimate revision +8.51%

Current year estimate revision +5.10%

Brocade is a networking company catering to the SAN and IP networking market segments.

The company exceeded estimates in the last quarter. While temporary issues in the SAN business led to a slight weakness in that segment, the long-term prospects remain positive. For one, IDC sees continued growth in fiber channel storage, which bodes well for the company. For another, the relationship with Inspur Group was expanded, which is a leading cloud infrastructure provider in China. IP networking did better, although router sales to service providers were impacted.

While the company continues to innovate within these segments, it is now in the process of building an open, software-defined, virtualized and highly programmable mobility platform targeting 5G standards. This can increase its total addressable market.

Control4 Corporation CTRL

Zacks Rank #1

Zacks Industry Rank #28

Current quarter estimate revision +925.00%

Current year estimate revision +466.67%

Control4 Corp facilitates home automation through its software solutions including Director, Navigator, Composer Express and Composer Professional Edition, as well as through networking devices, audio and video solutions, lighting products, thermostats, security products and communication products. Its offerings therefore help monitor the home, display things on screens and personalize the home automation (including email notification based on home events).

In addition to the strong growth projections this year, there was also some positive news flow. Last month, the company announced that it would be working directly with Australian home automation integrators to improve distribution in a market with very high Internet connectivity. It also hired local staff to facilitate the process. Earlier in the month, it introduced a line of intelligent lighting products for Europe and Asia markets.

Electro Scientific Industries ESIO

Zacks Rank #1

Zacks Industry Rank #14

Current quarter estimate revision +16.36%

Current year estimate revision +33.33%

Electro Scientific Industries, through its Component Processing and Micromachining segments offers laser-based technology for semiconductors, passives, consumer electronics and other microtechnology applications.

The company topped estimates in the last quarter. Management said that the company delivered on its turnaround plan and order rates are definitely on the rise.

In addition, last month, it also announced the Garnet adaptable laser micromachining platform for high-volume cutting, marking, drilling or engraving applications to lower the cost of ownership for consumer electronics, automotive and soft goods markets in China. It can be configured and delivered at short notice in line with the short product ramp times typical of contract manufacturers in China.

Cutera Inc CUTR

Zacks Rank #1

Zacks Industry Rank #14

Current quarter estimate revision +47.37%

Current year estimate revision +50.00%

Cutera makes laser and energy based aesthetics systems targeted for medical practitioners.

The company recently received regulatory approval from Canada's medical device regulatory authority, Health Canada, as well as the Taiwanese Ministry of Health and Welfare for its enlighten picosecond laser platform. The system had been previously approved by the U.S. FDA for tattoo removal and treatment of benign pigmented lesions. The company said that commercial shipments to Canada and Taiwan would begin immediately.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

BROCADE COMM SY (BRCD): Free Stock Analysis Report

CUTERA INC (CUTR): Free Stock Analysis Report

ELECTRO SCI IND (ESIO): Free Stock Analysis Report

APPLD MATLS INC (AMAT): Free Stock Analysis Report

CONTROL4 CORP (CTRL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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