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Recently, we discussed the influence of the effective tax rates on stock prices. In our article “Investing in Stocks with High Taxes” we investigated a strategy for investors to beat the DJIA by investing in Dow stocks with high effective tax rates rather than low effective tax rates.

We applied the same logic to analyze technology stocks. We believe tech stocks with higher effective tax rates generally perform better. Stocks with higher effective tax rates can reduce their taxes and increase their after-tax earnings by pursuing similar aggressive accounting strategies that are employed by the likes of CSCO or YHOO.

In order to demonstrate the effectiveness of our thesis, we compiled a list of the top 30 US Tech Stocks (the industry classifications are sourced from Finviz) by market cap and ranked them based on their annual effective tax rates. The top and bottom halves and their performances are shown below.

HIGHER EFFECTIVE TAX RATES

Annual Eff.Tax Rate

YTD Return

52-week Return

Motorola Solutions

(NYSE:MSI)

60.0%

18.0%

45.4%

Automatic Data Processing

(NASDAQ:ADP)

35.6%

12.9%

19.74%

Salesforce.com

(NYSE:CRM)

33.2%

-1.1%

57.93%

Intuit Inc.

(NASDAQ:INTU)

33.0%

10.5%

54.23%

American Tower Corp.

(NYSE:AMT)

32.8%

-4.1%

19.21%

Applied Materials Inc.

(NASDAQ:AMAT)

30.1%

4.4%

4.43%

Texas Instruments

(NASDAQ:TXN)

29.1%

6.7%

33.00%

Intel

(NASDAQ:INTC)

28.6%

-4.7%

-14.65%

Oracle

(NYSE:ORCL)

25.3%

8.0%

29.50%

IBM

(NYSE:IBM)

24.7%

13.1%

27.42%

EMC Corporation

(NYSE:EMC)

24.5%

16.7%

38.81%

Microsoft

(NASDAQ:MSFT)

24.1%

-9.4%

-17.19%

Apple

(NASDAQ:AAPL)

23.5%

4.7%

36.75%

Dell Inc.

(NASDAQ:DELL)

21.3%

9.8%

-11.95%

Google

(NASDAQ:GOOG)

21.2%

-12.2%

-5.19%

AVERAGE

4.89%

21.16%

LOWER EFFECTIVE TAX RATES

Annual Eff.Tax Rate

YTD Return

52-week Return

Yahoo! Inc.

(NASDAQ:YHOO)

20.7%

-3.1%

-12.34%

Juniper Networks

(NYSE:JNPR)

20.6%

4.2%

23.38%

Hewlett-Packard

(NYSE:HPQ)

20.5%

-4.8%

-24.87%

Verizon

(NYSE:VZ)

19.4%

6.8%

32.81%

QUALCOMM

(NASDAQ:QCOM)

17.0%

8.3%

27.19%

Adobe Systems

(NASDAQ:ADBE)

17.0%

9.3%

-0.50%

Cognizant Technology

(NASDAQ:CTSH)

16.5%

8.2%

52.32%

Cisco Systems

(NASDAQ:CSCO)

15.6%

-17.6%

-38.44%

Vmware

(NYSE:VMW)

14.2%

-3.3%

54.73%

Thomson Reuters

(NYSE:TRI)

13.1%

10.6%

15.64%

NetApp, Inc.

(NASDAQ:NTAP)

10.7%

-13.6%

36.53%

Corning Inc.

(NYSE:GLW)

7.5%

2.1%

-0.35%

Broadcom Corp.

(NASDAQ:BRCM)

1.4%

-12.1%

10.12%

Agilient Technologies

(NYSE:A)

1.1%

12.8%

32.94%

AT&T

(NYSE:T)

-6.4%

6.2%

22.02%

AVERAGE

0.93%

15.41%

In the last 52-week period, the average return of the first group of 15 tech stocks with higher annual effective tax rates was %21.16, beating the 15.41% average return of the second group of 15 tech stocks with lower annual effective tax rates. The relative performance of the first group is even better since the beginning of the year. The average Year-To Date return of the first group is %4.89, four percentage points more than the YTD return of the second group.

EMC, MSI, IBM and ADP have high effective tax rates and they are the best performers among the top 30 US Tech Stocks in 2011. With its high effective tax rate, AAPL is in the first group as well. Apple is very popular among hedge funds. D.E. Shaw’s largest position was Apple. Nearly 200 hundred hedge funds own 4% of Apple’s outstanding shares. Hedge fund stars like David Einhorn, John Griffin, Stephen Mandel, Chase Coleman and John Burbank all own AAPL in their portfolios.

We like stocks with high effective tax rates and expect them to perform well by decreasing their effective tax rates in future. The companies with higher effective tax rates are also usually more profitable. We will compile another list and check the performances of tech stocks at the end of second quarter.

Disclosure: I am long T, MSFT.

Source: Higher Effective Tax Rates: An Alternative Way of Picking Tech Winners