Tech stocks have taken a beating in 2011, but in my opinion the market has it all wrong. The PowerShares Index (QQQ) has been trending sideways all year in the face of increased revenues and profits. Many tech stocks have been beating estimates and projecting growth into 2012. The QQQ has barely returned 1% for 2011, and 2012 isn't looking any better. Using LEAPS, you can beat the market and get returns ranging from 10% to 20%.
Tech analysts are underestimating earnings potentials based on the weak European outlook. This is depressing stock values. Solid stocks with histories of sales and earnings growth will be able to withstand knee-jerk reaction to news from Europe. Although I don't expect to see a 2012 bull market in tech, it will still be possible to profit from the sideways-trending market.
Agilent Technologies (A) is on top on my watch list. Its earnings were ahead of the average estimate last year, and it's expected to grow sales for the next three years. In fact, it has increased earnings over the past three years. Stocks with history like this Agilent should be trading at a much higher multiples. Agilent's current P/E ratio of 11.14 is very attractive, especially with the industry average around 15.
This company is focused on reinvestment in debt reduction and growth of its business. The current debt to equity ratio is low at 45%, placing it in the top 20% for the industry. Revenue in both of its main markets are up for the year, averaging a 10% gain. Expectations for 2012 include a 5% increase in per-share earnings.
Agilent just acquired BioSystem Development, maker of the AssayMap micro chromatography platform. This acquisition will help them automate work flows to meet the needs of the life sciences industry. Agilent is exploring scientific collaborations with Yale University. Ron Nersesian has also stated that wireless growth “has been excellent” for Agilent. Agilent is deeply embedded in the wireless market, especially among tablet makers.
I can't understand why the stock got beat up so badly earlier in the year, unless it was purely technical. The drop started May 13 with an earnings announcement which exceeded expectations. Agilent opened that day at an eleven-year high. The move was in anticipation of the announcement, piercing a major resistance level. Second quarter earnings proved insufficient to keep long term holders of the stock happy. Since then a base has been forming between $30 and $35. The recent dips are divergent, indicating support activity is growing around $35. The median price target of $47 is low; I think it will hit at least $50. January 2013 $42 calls are selling for about $3.50, or 11% of the current stock price. If called out, this will return an additional 20%. Agilent is definitely a stock to watch.
Red Hat (RHT) is another often overlooked stock with great potential. Red Hat is a leading provider of open-source software, including its Red Hat Linux operating system. Its impressive four-year bull run paused this year when the stock entered a trading range. Red Hat's revenue fell just shy of analyst expectations, sparking a sell-off even though it was a huge gain over the previous year. Fears rippling through the tech sector have hampered its outlook and given short-term traders plenty of opportunity. Looking at the 200-day moving average, it is plain to see that long-term money is still interested. The P/E ratio is a whopping 52 times earnings, usually not an attractive valuation. Red Hat's lack of debt mitigates this risk, in my opinion.
I expect to see Red Hat continue to trade within the target range of $30 to $50 until global growth is more evident. There is plenty of evidence of a strengthening economy, but it will take time for the average investor to realize it. This range will provide many opportunities for profits. January 2013 $50 calls are currently selling for about $3.75, or a 9% discount of current stock prices. This would also leave room for a possible 22% gain, should Red Hat return to trend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
