Of the 11 sectors covered by S&PCapital IQ , only one is on track for lower profits in 2013: technology.
Theprofit anemia stems from severalfactors , including:
- Extremely low levels of government spending due to the current sequester.
- Depressedsales activity in Europe. The tech sector has more exposure to Europe than any other sector.
- A lack of any hot new products or trends to trigger interest among buyers.
Yet as we've noted many times, several tech firms are sitting on stunning levels ofcash . Cisco Systems (Nasdaq: CSCO) , Microsoft (Nasdaq: MSFT) , Oracle (Nasdaq: ORCL) and others may have a hard time generating organic growth, but they have a long track record of acquisitions to help get the needle moving.
Though it's unwise to buy astock simply because you suspect it is abuyout candidate, you can't ignore a company's appeal in amerger andacquisition (M&A) scenario if it has a strong base of technology or an impressive customer list. And you surely need to pay attention if that stock has recently traded sharply lower, creating more compelling valuations for a potential buyer -- or simply on a stand-alonebasis .
Here are two slumping techstocks that now hold solid value in light of their considerable growth prospects andmarket positioning.
Palo Alto NetworksFusion-io
Risks to Consider: Never buy a stock solely on the basis of buyout hopes. Instead, look at possible M&A activity as a potentialcatalyst .
Action to Take --> It's hardly a bold move to predict that we will see major transactions in the technology sector in the second half of this year. Deal-making is the lifeblood of this sector, and cash-rich balance sheets, along with an anemic top-line organic growth, set the stage for more deals. Whichever tech stock you are researching, analyze them in the context of the broader landscape. Do the companies you're looking at have the right products or customerbases that would hold appeal to bigger players? Those traits have been markers for success in the past.
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