Big-cap technology stocks have traditionally been prime beneficiaries of a strengthening economy. This time around is no different: The S&P 500 information technology sector returned 22% over the 12 months through early February, vs. A 17% gain for the broader S&P 500. The good news is that large tech stocks still have room to run, say experts, thanks to strong growth prospects and hefty cash stockpiles, which they can continue to deploy to their—and their investors’—advantage.
In a relative sense, mega-cap tech looks downright cheap at the moment. The price/earnings ratio for the S&P 500 -information technology sector—using estimated 2015 operating earnings—was recently 15.9, compared with 16.2 for the overall S&P 500, according to S&P Capital IQ, which recommends overweighting large-cap tech stocks. Meanwhile, tech sector earnings are forecast to grow by 11.2% in 2015, well in excess of the 8.8% rate projected for the overall S&P 500. What’s more, big tech companies are collectively sitting on mountains of cash—Apple, Microsoft, Google, and Cisco alone account for about 20% of total U.S. Corporate cash holdings—leaving them plenty of leeway to hike dividends and extend share-repurchase programs.
Many analysts believe that the most attractive opportunities in tech lie with old-guard companies that have been punished by declining PC sales but are actively repositioning their businesses. At Microsoft (MSFT), for instance, revenues from cloud computing more than doubled in the past quarter. Credit Suisse analyst Philip Winslow believes that Microsoft’s new initiatives can return it to double-digit earnings-per-share growth. Winslow believes the stock could climb to $55 over the next year, from a recent price of around $42. It also pays a robust 2.9% dividend yield.
Intel (INTC), the world’s -largest chipmaker, has invested heavily in producing micro-processors for mobile devices. And the company projects that revenue from its high-margin data center group—which currently represents about one-quarter of its sales—will grow by 15% a year through 2018. “To say the data center group is a hidden gem is an understatement,” contends -Jefferies analyst Mark -Lipacis, who thinks Intel could jump from $34
a share to $50 this year.
Google (GOOG) has aggressively invested in its Android operating system, which drives the vast majority of smartphones. The search giant’s largest source of revenue, advertising sales, rose by about 17% in 2014. J.P. Morgan analyst Doug Anmuth notes that Google is one of the few companies in the S&P 500 projected to grow both revenues and earnings at a 15% to 20% rate over the next three years and “will remain a primary beneficiary of the secular shift to online spending.”
Investors can also gain diverse exposure to large-cap tech through the Technology Select Sector SPDR, an ETF that tracks the tech sector of the S&P 500.
The fund, which -has a 0.15% expense ratio, holds 71 companies with an average market cap of $129 billion. Over time, Big Tech really may be beautiful.
This story is from the March 1, 2015 issue of Coins2Day.