7 Technology Sleepers That Look To Be Awakening

by: Alan Brochstein, CFA

In 2011, technology squeaked out a "win", beating the S&P 500 narrowly with its 1.33% price return. Over longer periods, the sector, which, at 19%, is the largest, continues to be a solid performer, rising almost 21% over the past three years (S&P 500 + 11.7%), second only to the consumer discretionary sector.

Though the year is young, last week's 2.6% jump for the sector started the year well. For those who track the sector, the SPDR Technology (NYSEARCA:XLK) represents the entire sector on a market-weighted basis. Down just 4% from its 52-week high, it looks like it is about to break out, banging against resistance for what is now the fifth time. With such positive dynamics for the sector, one would think that most tech stocks are performing well, but that is not the case. Of the 71 names in the S&P 500, 42 trade below the 200dma!

What's going on? A handful of very large stocks are driving the performance. Looking at the very biggest stocks in the index, Tech has 4 of the top 10 in the index, including Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), International Business Machines (NYSE:IBM) and Microsoft (NASDAQ:MSFT). All of these stocks trade well above their 200dma.

With the idea that some of the secondary names in the relatively strong sector may benefit from what I expect will be broader investor interest, I wanted to look for some stocks that may be showing some underlying technical strength under the radar. Looking at the 42 stocks below the 200dma, here is what I did (with Baseline):

  • >50dma (14)
  • <5% above 50dma (13)
  • Beating the S&P 500 over the past month (7)

Here are the stocks that made the cut (click to enlarge images):

So, these are relative laggards that are showing some near-term momentum, with all of them above the 50dma and beating the S&P 500 over the past month. Before I discuss a few of the names, I want to share some summary thoughts. While Altera (NASDAQ:ALTR) is up slightly over the past year, the other six stocks are down anywhere from 6% to 31%. A couple of the stocks are very close to crossing the 200dma, as Western Union (NYSE:WU) and Adobe (NASDAQ:ADBE) are within 1%. While all of the stocks are beating the market over the past month, three have been beating it for the past three months, including ADBE, ALTR and WU. Finally, four of the stocks (highlighted) trade below 12 PE, and, with the exception of Fidelity Info (NYSE:FIS), all of them trade below the average multiple of the past five years.

Of the seven stocks, just ADBE and Amphenol (NYSE:APH) are on my 100-stock watchlist. I looked at Harris (NYSE:HRS) earlier this year when it hired an outsider as its new CEO. With over 70% of its revenues from government, it's not surprising that the stock has been for sale since this summer. HRS has a 3% dividend yield, the highest since 1999, and its PE is the lowest in its history as a public company.

I have preferred Xilinx (NASDAQ:XLNX), which is also on my watchlist, to ALTR for the past year or so, because these two take turns leap-frogging each other. For those not familiar with FPGAs, there is a nice secular story for these semi-conductor companies.

I have never looked closely at the other three, so I will not comment, but I have long admired APH. The company has some defense exposure , which may be weighing a bit, plus they had another flooding problem in New York this summer, which impacted their results. I maintain a target of 53 a year out based on attaining 15PE, so it looks only marginally attractive. Perhaps I am too conservative, as the stock has traded at a median of 18PE over the past decade.

ADBE is a more recent addition to my watchlist. If you are a CNBC viewer, you too may have been paying attention in October when guest host Roger McNamee of Elevation Partners suggested HTML5 is a game-changer for the company. You should have seen Jim Cramer's ears literally jump up! Cramer concluded correctly, in my view, but he erroneously gave up a month later when they pre-announced. For those not familiar with the story, ADBE had been given up for dead as AAPL refused to put "Flash" on the iPhone. The stock ran up hard on Cramer's plugs, but gapped down when they shared 2012 guidance in November. There is a move towards subscription rather than license sales for some of their business, which was the main reason for the disappointing numbers. I caught the call in December and think that this sounds like a pretty solid story (that goes beyond HTML5). My 38.50 target a year out is based on 14PE (plus a small amount of cash after a recent acquisition closes). This is one of the names I am considering adding to my Top 20 Model Portfolio.

While ALTR and JDS Uniphase (JDSU) are expected to see earnings decline in 2012, all seven of these stocks are forecast to grow earnings in 2013. While short-term momentum following longer-term underperformance is no guarantee of success, at least some of these names seem worthy of further investigation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.