By Michael Vodicka
It was one of the top-performing sectors in 2012, with many companies from the group hitting new 52-week highs. And with this bullish trend still in play, these stocks are in position for more of the same in 2013.
I'm talking about big technology.
With investors searching for stability in 2012, big technology was especially hot this year. That pushed mega-cap technology companies such as International Business Machines (IBM) and Oracle (ORCL) to new all-time highs. It also lifted the Nasdaq 100, an index of major technology companies, to a new all-time high. Take a look at the chart below...
Simply put, big technology has never been stronger.
The industry is sitting on record earnings. In fact, earnings of big technology companies are well ahead of 12 years ago, when the Nasdaq crossed the 5,000 mark. After 12 long years of a bear market in technology, strong earnings growth has many former high-fliers trading at record low valuations. The list includes Microsoft (MSFT), delivering full-year earnings of $2.69 per share in 2011, an all-time high and 28% increase from the previous year. Cisco Systems (CSCO) is on pace to deliver earnings of $1.77 per share in 2013, an all-time high as well.
Beyond earnings, big technology also has pricing power. With global markets, suppliers and distribution networks, there are few companies more equipped to handle economic volatility with pricing power than firms from this group. Not to mention, the technology industry is also swimming in cash. For the time being, these big cash positions are being managed conservatively. But longer term, this extra cash will likely create opportunities for big technology to invest in growth, pay dividends and buy shares back.
A lot of big technology companies actually pay a dividend now, too. Take Intel Corp. (INTC) for example, which isn't typically thought of as a dividend stock. The company now sports a dividend yield of almost 4.5%, more than twice the return of a 10-year Treasury note.
And with the outlook for 2013 being murky at best, with tons of landmines just like we've seen in the past few years, big technology looks well positioned to navigate this volatility. And this trend should set the foundation for another strong performance in 2013.
In fact, these four stocks could shine even brighter in 2013...
Oracle has been on a tear in 2012, up 31% on the year and trading within 8% of the March 2011 all-time high. These gains are being driven by more earnings growth, with full-year 2013 earnings expected to increase 9% to $2.55 per share. That has shares trading at a discount to its peers and the market. With a forward price-to-earnings (P/E) ratio of just 13, Oracle trades at a discount to its 10-year average P/E of 16 and its peers' P/E of 15.
2. Cisco Systems Inc.
Cisco was a big-time high flyer from the 1990s. But now, 15 years later, the company looks more like a solid blue chip in technology with a very respectable dividend yield of nearly 3%. Hardware has been a tough segment for the past few years, with the desktop space becoming largely commoditized. But Cisco's position in higher-end networking gear protected it from some of the price erosion in desktop hardware. Cisco is another big technology company that looks undervalued, trading with a forward P/E of 11, a nice discount to its peer P/E average of 15. With investors on the hunt for blue chips with yield, Cisco could become a hot destination soon.
3. eBay Inc.
This is looking like a solid turnaround story. Online auction website eBay (EBAY) saw its margins fall a few years back as it fell out of favor with loyal buyers and sellers. But in response to eroding market share and margins, management implemented new initiatives to become more profitable and boost growth. Those efforts are now paying off. The company continues to see good results in its core business, including its commerce and payments systems divisions. Looking forward, analysts are projecting year-over-year earnings growth of 17% in 2013, calling for full-year earnings of $2.40 per share.
Amazon.com (AMZN) is easily the priciest stock on the list, trading with a forward P/E ratio of 60. But that hasn't slowed shares down one bit this year, up a market-crushing 44%. Amazon is doing a lot of interesting things right now. It's chipping away at big-box retailers such as Best Buy (BBY) with its incredible online presence. It's also attacking Apple (OTC:APPL) with its e-reader, Kindle. In addition, the company is becoming a major player in the cloud space as a provider of web and cloud services. When you add it all together, Amazon is a top player in a number of major tech segments. Analysts are calling for earnings of $1.80 per share in 2013, which creates a lofty valuation. But if 2013 looks anything like 2012, then this tech mega cap should be in good shape.
Risks to Consider: Technology has seen market-leading gains in the last year. If investor sentiment cools, profit taking could drive outflows from large tech stocks.
Big technology has never looked stronger. The industry is sitting on record earnings, record margins and record cash. And with investors looking for more stability in a market clouded with uncertainty, big technology looks well positioned for more gains in 2013. The four companies mentioned here are particularly set for a strong year ahead.
Additional disclosure: StreetAuthority LLC owns shares of INTC, CSCO in one or more of its “real money” portfolios.