There’s a strong possibility you are reading this on your cell phone or tablet. On this same device, you may have recently played a game, watched a video, checked your Facebook (FB) page, Twitter (TWTR) feed, or email account. You might also have made an online purchase.
Think back to just a short time ago when you either did not do some of these things, or you did them on a desktop computer or in an actual store.
Shifts in technology trends have created dynamic opportunities for investors, which is one reason Fidelity’s most recent quarterly sector scorecard gives the tech sector a preferential outlook. Historically, tech has done well at this point in the business cycle. And it also looks strong from a fundamental, relative value, and momentum perspective, as of the end of the second quarter of 2014.
Needless to say, if you are interested in tech, opportunities abound. But with stocks at all-time highs, it could be time to be choosy.
Here are four timely strategies to consider:
1. Value propositions in tech
The Fidelity stock screener can provide you with the capability to identify opportunities in the tech sector, based on numerous filters of your choosing. With stocks trading near all-time highs, value can be an important criterion for some active investors. Currently, the tech sector is trading at an 11.9x price-to-cash flow multiple (P/CF).1 That’s the highest it has been since 2009, but is still well below pre–financial crisis levels, which were in the mid to upper teens, and is also well below the 2001 bubble level of 26.7x.
As of August 28, 2014, large-cap tech stocks with the lowest (best) price-to-cash flow ratio in the market are:
- Electronics equipment maker Hitachi (HTHIY)—5.08 P/CF ratio
- Semiconductor company Micron Technology (MU)—6.22 P/CF ratio
- Print solutions firm Xerox (XRX)—6.34 P/CF ratio
2. Highly rated tech stocks with strong cash flow growth
In technology, cash flow can be a particularly important metric because it may help provide a better look at the future prospects of a business, compared to earnings.
As of August 28, 2014, tech stocks with the highest cash flow growth rate in the market (trailing twelve months vs previous trailing twelve month period) and a very bullish Equity Summary Score (ESS)—a composite of independent research ratings provided by Starmine—are:
- Computer systems firm CSP Inc (CSPI)—9.5 ESS out of 10
- Telecommunications equipment manufacturer Arris Group (ARRS)—9.2 ESS out of 10
3. Tech stocks for income
With the 10-year Treasury yield still historically low (2.4%), investors continue to seek other sources of income. Stocks have been one popular option; the S&P 500 dividend yield is not far off the 10-year, at 2.1%.
Compared with other sectors, tech companies frequently reinvest a larger percentage of their revenues back into their businesses in order to grow and develop new technologies. For this reason, tech stocks do not typically feature attractive dividend yields. However, this does not mean you can’t find tech stocks with relatively strong income components.
As of August 28, 2014, large-cap tech stocks with the highest annual dividend yield and highest return on equity (trailing twelve months) in the market are:
- IT services company Paychex (PAYX)—3.6% dividend yield
- Hardware supplier Seagate Technology (STX)—2.8% dividend yield
- Semiconductor designer Texas Instruments (TXN)—2.5% dividend yield
4. Tech stocks with technical strength
Active investors who prefer to take a more tactical, chart-driven approach might consider trading tech stocks that are exhibiting a specific technical pattern that fits their strategy.
For bullish investors, semiconductor manufacturer On Semiconductor (ONNN), hardware and software developer Logitech International (LOGI), and software company BroadSoft (BSFT) show up in the “Bullish Chart Patterns” expert screen, provided by Zachs Investment Research, as of August 28, 2014.
For bearish investors looking for short ideas, smartphone game developer China Mobile Games (CMGE), online game developer Perfect World (PWRD), and Internet-based postage solutions firm Stamps.com (STMP) appear in the “Falling Stars” screen, provided by Recognia.
The Equity Summary Score is provided for informational purposes only, does not constitute advice or guidance, and is not an endorsement or recommendation for any particular security or trading strategy. The Equity Summary Score is provided by StarMine, an independent company not affiliated with Fidelity Investments. For more information and details, go to Fidelity.com.
As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation and your evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.
Past performance is no guarantee of future results.
Investing involves risk, including risk of loss.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies.
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