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Time to Invest in the Technology Sector?

Sejuti Banerjea

Goldman Sachs seems to think that despite the huge run up in technology share prices, the sector is a great place to invest in right now. The firm has an overweight rating on the sector and feels it isn’t right to compare it with the dotcom bubble.

Nor do the analysts think that a handful of companies are pushing up the sector average. The top five information technology stocks account for 12% of the trailing 3-month return according to the firm, which is lower than in earlier bull periods of 1991, 1996, 2001 and 2012.

While both cyclical segments (tech hardware and semiconductor) and those offering modest economic growth (software and services) are recommended, the second category is preferred by the firm. There are 16 recommendations in this group that it says have “high and stable sales growth, high ROE, and trade at reasonable valuations.”

The Zacks-classified technology sector appreciated 29.0% over the past year, better than the 21.2% average for the S&P 500. While the construction and business services segments, with appreciations of 25.2%and 24.4%, respectively were also greater than the S&P 500, none of the sectors matched up to the technology sector.

Over the last 5 years, the tech sector appreciated 76.2%, bested only by the aerospace segment, which appreciated 95.0% and leaving behind retail and business services, which were up 72.3% and 70.7%, respectively. The S&P 500 was up 62.8%.

On a price-to-forward twelve months’ earnings basis, the sector is trading at the high end of its trading range over the past year and a premium to the S&P 500. In terms of price-to-TTM sales, it’s trading at the high end of its range, which is also a slight premium to the S&P 500. The price-to-book value tells the same story. While the price-to-cash flow ratio is also at the high end of the historical range, it is a significant discount to the S&P 500, which makes sense, given that technology companies usually have a lot of cash.

While the valuation picture is negative, there are gains to be made depending on which stocks you’re interested in. Zacks methodology shows that around 22% of Zacks Rank #1 (Strong Buy) stocks are in the technology sector. So here are a few of them, both small and large-

Microsoft Corporation MSFT: Belongs in the computer software industry (top 22% of the Zacks-ranked industries) with 2020 EPS up 28 cents (5.2%) in the last 30 days and a 4-quarter surprise history of +13.0%.



Western Digital WDC: Belongs in the computer storage devices industry (top 18% of the Zacks-ranked industries) with 2020 EPS up 68 cents (26.6%) in the last 30 days and a 4-quarter surprise history of -5.6%.


Applied Materials AMAT: Belongs in the semiconductor equipment-wafer fabrication industry (top 4% of the Zacks-ranked industries) with 2020 EPS up 5 cents (1.3%) in the last 30 days and a 4-quarter surprise history of +4.9%.



Mellanox Technologies MLNX: Belongs in the electronics-semiconductors industry (top 4% of the Zacks-ranked industries) with 2020 EPS up 50 cents (7.0%) in the last 30 days and a 4-quarter surprise history of +14.2%.

 


ePlus Inc PLUS: Belongs in the electronics-semiconductors industry (top 5% of the Zacks-ranked industries) with 2020 EPS up 16 cents (2.7%) in the last 30 days and a 4-quarter surprise history of +15.1%.

 



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Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
Applied Materials, Inc. (AMAT) : Free Stock Analysis Report
 
Western Digital Corporation (WDC) : Free Stock Analysis Report
 
Mellanox Technologies, Ltd. (MLNX) : Free Stock Analysis Report
 
ePlus inc. (PLUS) : Free Stock Analysis Report
 
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