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5 Tech Stocks to Buy as Sector Soars to Record Highs

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As tech stocks hover around their highest levels, several market watchers believe that the sector may surge even higher. The Technology Sector SPDR (XLK) has touched its highest levels in the last 16 years recently and gained 0.2% on Tuesday even as stocks ended lower.

The Nasdaq finished in the green and recorded its highest close in over a year, led by gains among tech names. Such a trend is likely to continue because of strong sector fundamentals, impressive earnings from tech heavyweights and prospects of a weaker dollar. Adding tech stocks to your portfolio makes perfect sense at this point.

Strong Sector Fundamentals, Impressive Earnings

Most market analysts have taken the view that the gains the sector is experiencing do not in any way resemble those witnessed in 2000 when the dotcom bubble burst. At that point several smaller companies were highly overpriced, since they had little to show in terms of earnings. Now, sector fundamentals are strong and are responsible for the price spikes.

This is evident from the strong earnings posted by big names during the second quarter. Tech heavyweights such as Apple (AAPL - Free Report) , Facebook , Alphabet (GOOGL - Free Report) , Amazon (AMZN - Free Report) and Microsoft (MSFT - Free Report) have all posted encouraging earnings numbers.

As of Jul 29, results from 84.6% of the sector’s total market cap in the S&P 500 were available. Total earnings for these tech companies are down 0.9% from the same period last year in spite of 2.1% higher revenues, with 83.3% beating EPS estimates and 77.8% beating revenue expectations. This is a better performance than what we have seen from the same group of tech companies in the preceding quarter (read: Q2 Earnings Trends Already Established).

Weaker Dollar to Boost Tech Stocks Further

Technology has the highest exposure to the dollar compared to other sectors. According to market watchers, a substantial share of its revenue, nearly 59%, is earned abroad. This is why the value of the dollar is crucial in determining earnings trends for the sector for the rest of the year.

Last week, the dollar declined after the Fed refrained from raising rates in its latest policy statement. The greenback was also dampened by a particularly weak GDP reading. The dollar has recovered marginally since then but prospects of a downside continue to linger.

Weak economic data released on Monday raised fresh questions about the state of the U.S. economy. The ISM Manufacturing Index fell to 52.6 in July from 53.2 in June, signaling a slowdown in overall factory growth. Additionally, construction spending declined 0.6% to its lowest level in June since the same period last year.

Our Choices

Strong sector fundamentals, borne out by impressive earnings from sector heavyweights, indicate that gains for tech stocks are likely to continue. Further, a weaker dollar would go a long way in aiding a sector with significant foreign exposure.

This is why it makes good sense to pick tech stocks at this time. It is also important to pick winning stocks.  

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Netgear Inc. (NTGR - Free Report) designs technologically advanced, branded networking products that address the specific needs of small business and home users.

Netgear has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 26.8% for the current year. Its earnings estimate for the current year has improved by nearly 10% over the last 30 days.

EarthLink Holdings Corp.  provides IT services and communications to business and residential customers primarily in the U.S.

EarthLink Holdings has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 40.6% over the last 30 days.

NVIDIA Corporation (NVDA - Free Report) offers digital media processors and related software for a wide range of visual computing platforms.

NVIDIA has a Zacks Rank #1 and a VGM Score of B. The company has expected earnings growth of 44.3% for the current year.

Intel Corporations (INTC - Free Report) earnings exceeded the Zacks Consensus Estimate on earnings while revenues came in line with estimates. Intel has guided third-quarter revenue of around $14.9 billion, up 10.1% sequentially. This is also better than the Zacks Consensus Estimate of $14.58 billion (read: Intel Q2 Earnings Beat, Data Center Concern is Overblown).

Intel has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 7.7% for the current year. Its earnings estimate for the current year has improved by 3.5% over the last 30 days.

Texas Instruments, Inc. (TXN - Free Report) beat on both earnings and revenues during the second quarter. Earnings and revenue guidance for the third quarter remain above their respective Zacks Consensus Estimate (read: TXN Beats Zacks Consensus, Margin Expansion Story Continues).

Texas Instruments has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 11.6% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 22.93, lower than the industry average of 25.15. Its earnings estimate for the current year has improved by 3.8% over the last 30 days.

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