Technology has been one of the standout sectors in recent times. Notable trends in this space include cloud computing, Big Data, Bring Your Own Device (BYOD), Internet of Things (IoT), flash storage, social networking and 3D printing.

The Technology Select Sector SPDR (XLK Quick QuoteXLK - Free Report) has gained 10.4% year to date and has emerged as the winneramong the 10 S&P 500 sectors. In comparison, the S&P 500 itself gained 6.5% over the same period. The technology-heavy Nasdaq has gained 9.6% during the year-to-date timeframe.

Tech heavyweights have been powering gains for the sector. Particularly, the storage market is witnessing a steady increase in demand, given the fast-growing stored data volume and especially the explosive growth of unstructured data. NAND (nonvolatile storage technology) demand is expected to remain robust this year. Solid State Drive (SSD) demand will also grow and could even surpass manufacturing capacity, leading to periodic shortage and higher pricing in the near term.

Market Prospects

According to market research firm IDC, revenues from Big Data and business analytics applications are expected to grow from $122 million in 2015 to over $187 million in 2019 (up more than 50%).

Another research firm, Research and Markets, projects worldwide data center storage market to expand at a four-year compound annual growth rate (CAGR) of 15.01% during 2016–2020.

Also, TechNavio projects enterprise SSD market to grow at a CAGR of 17% during 2016–2020. The SSD segment’s growth potential is a major positive for storage stocks because this could offset the losses incurred due to the secular decline in the PC market, which does not necessarily use SSDs.

We believe that the rapid adoption of storage-based technologies will be the key catalyst going ahead. We see the growth trend in storage, particularly SSD, to be beneficial to companies like Seagate Technology plc (STX Quick QuoteSTX - Free Report) and Western Digital Corporation (WDC Quick QuoteWDC - Free Report) , which have based their products in the SSD storage market.

Key Drivers

With the help of our new style score system, we suggest investors to build positions in the above two stocks that flaunt a Zacks Rank #1 (Strong Buy). Moreover, these stocks have a VGM Style Score of ‘A’, rising earnings estimates, and other favorable valuation criteria. You can see the complete list of today’s Zacks #1 Rank stocks here.

When it comes to the VGM Score, V stands for Value, G for Growth and M for Momentum. The score highlights the determining elements in a stock that can push the stock price higher. We can essentially filter the negatives and focus on the positives which drive price. This is an advantage to certain investors, who want to focus on a particular kind of stock.

Also, the Computer – Storage Devices space currently has a Zacks Industry Rank of 22 out of more than 250 industries, suggesting its impressive positioning.

Let’s take a look at these two top-ranked stocks and how investors can use the VGM scoring system combined with a Zacks Rank #1 to give them best investment opportunities in this space.

Seagate

Seagate is the second-largest manufacturer of hard disk drives (HDDs) in the U.S. The company offers a portfolio of solid state drives and solid state hybrid drives. It also offers an array of disk drive products for the enterprise, client compute and client non-compute market applications. The company provides data storage services for businesses, including online backup, data protection and recovery solutions.

Seagate carries a Zacks Rank #1 and focuses more on the enterprise side, which is the key growth area in the information technology sector. Seagate has gained 23.3% during the year-to-date period and has a market cap of $13.78 billion. The company has a VGM Score of “A” and long-term expected earnings growth rate of 8.17%. 

In the last 60 days, current-quarter estimates have risen from 85 cents per share to $1.06 per share, while current-year estimates have risen from $3.80 per share to $4.48 per share. Also, the company has delivered three positive earnings surprise in the  last four quarters with an average beat of 3.28%.

Seagate’ share price movement has been quite favorable. In the last six months, its shares returned 30.9% compared with 23.6% gain recorded by the Zacks categorized Computer – Storage Devices industry.

Western Digital

Western Digital is one of the largest HDD producers in the U.S. The company designs, develops, manufactures and markets a broad range of HDDs used in desktop PCs, servers, network-attached storage devices, video game consoles, digital video recorders and a host of other consumer electronic devices. By wrapping up the acquisition of SanDisk during the fourth quarter of fiscal 2016, the company has been able to venture into the flash drive storage technology space.

Western Digital, a Zacks Rank #1 technology stock, has generated a year-to-date return of around 12.9%. The company has a market cap of $21.81 billion, a VGM Score of “A” and long-term expected earnings growth rate of 12.11%. 

The stock delivered three positive earnings surprises in the last four quarters with an average beat of 9.73%. Moreover, in the last 60 days, current-quarter estimates have risen from $1.38 per share per share to $1.79 per share, while current-year estimates have risen from $6.08 per share to $7.03 per share.

It must be mentioned that the acquisition of SanDisk has opened growth avenues for Western Digital and will help it gain market traction in SSD. The merger will lead to economies of scale, lower costs, increased market reach and acquisition of new technologies, among other synergies.

Going forward, we believe that the shift toward non-PC applications, secular growth of digital data and growing exposure to the small and medium business space are the long-term positives.

Western Digital’ share price movement has been quite favorable. In the last six months, its shares returned 40.5% compared with just 23.6% gain recorded by the Zacks categorized Computer – Storage Devices industry.

Conclusion

We are optimistic about these two stocks given their expected forward growth rates and estimate revision trends. We thus advise investors to consider these two tech stocks banking on the Zacks Rank and style score system, as these could yield impressive returns going forward.

So what you are waiting for? If you are looking for stocks that are well-equipped to overcome the bumps down the road, take a look at these two stocks.

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