5 Tech Stocks To Combine With Apple

| About: Apple Inc. (AAPL)

Let's face it, most investors hold Apple (NASDAQ:AAPL) in their portfolios either directly holding the stock or through a mutual fund whose largest holding is probably Apple. Or maybe you recently sold it to take profits after the huge run-up it's had over the last 12 months. But for those of you who still hold Apple, there are some additional technology names you can invest in and while you may be increasing your overall technology exposure, you will still maintain a fairly well diversified portfolio, even if these are your only technology holdings.

After all, the technology sector isn't as volatile as one might expect, particularly after the dot.com bubble and bust in 2001. The fact of the matter is that the technology sector is not as volatile as some of the other sectors in the S&P 500. I looked at the standard deviation of the Select Sector SPDR's as a proxy for the different sectors. What I found was quite interesting.

The Select Sector Technology SPDR (NYSEARCA:XLK) was the 4th least volatile of the 9 different sectors analyzed.

The most volatile of the Select Sector SPDR's were the Energy (NYSEARCA:XLE) and Materials (NYSEARCA:XLB) sectors with 31% and 30%, respectively. Investing in these sectors may be quite opportunistic, particularly with the fall in energy prices and basic materials, but what if you want to take a more conservative approach to growth? Like investing in technology? You can invest directly in the XLK, which would be a diversified approach to investing in the sector. And you get bad technology companies along with the good ones. Or, you can invest in the following 5 stocks with lots of upside potential:

  • EMC (EMC) - The leader in enterprise storage which has expanded to include storage software and services as well as a series of integrated solutions. With data becoming a competitive advantage for many companies, the storing and accessing of this data is vital. Recent announcements have spurred optimism that EMC will excel.
  • Google (NASDAQ:GOOG) - The largest online index of websites through the use of automated search technology. They generate revenue through online advertising and have recently acquired Motorola to delve into the area of handset manufacturing. There are questions abound about this strategy but Google is still ramping up to expand its core internet search business as well.
  • Microsoft (NASDAQ:MSFT) - The world's largest independent software developer turned technology conglomerate. Microsoft has five divisions, including Windows, Server and Tools, Online Services, MS Office Products, and the Entertainment and Devices division (Xbox 360, Halo, etc.) They now have an operating system that can compete in both the PC and Tablet environment and early reviews are positive. Analysts expect the company to gain traction with the launch of Windows 8 and other product launches planned for 2012.
  • Oracle (NASDAQ:ORCL) - The largest independent enterprise software company. The products include database, middleware, and application software designed for businesses. They also provide server hardware through the addition of Sun Microsystems. The introduction of cloud-based applications and faster systems will be a key driver of performance for the stock in 2013.
  • Qualcomm (NASDAQ:QCOM)- a designer and manufacturer of advanced semiconductors for mobile phones and wireless applications. Includes processors, GPS, WiFi, basebands and other applications for smart phones, tablets, and mobile PC's. They are one of the major suppliers to Apple and have built a strong partnership with the smart phone and tablet leader.

An equally weighted portfolio of these stocks purchased in July 2007 would have resulted in a 5-year annualized return of 4.1% (vs. a return of 0% for the S&P 500). Unfortunately, we could not perform the analysis with quarterly rebalancing. (Which we would have preferred.)

As expected, 2008 would have been the worst year of performance. Surprisingly however, it would not have underperformed the S&P 500. Returns in 2008 for the equally weighted portfolio was -37%, the same as for the S&P. The big difference is that in 2009, this portfolio would have returned 55% in 2009, versus only 26% for the S&P 500. It did underperform over the last 3-year period, however, with an annualized return of 9.8% (vs. S&P 500 14%).

Since past performance is not an indication of future results, this analysis should be taken with a grain of salt, and a margarita or two, if you wish. But it seems to me that the prospects for these companies are quite promising going forward as well. The chart below shows the current and target prices from Bloomberg estimates, as well as the number of buy, hold, and sell recommendations of the analysts that cover the stock. I don't know how good these analysts are or how accurate their price targets are, but the data show overwhelming optimism.

source: Bloomberg

Lastly, I always try to stress the importance of diversification in any investment portfolio. But these five stocks showed lower than expected (than I expected, anyway) correlation over the 5 year period analyzed. The table below shows that correlations range anywhere from .26 to .88 (EMC and Apple). In times of stress, however, these correlations will tend to increase. The Google/Apple correlation reached .91 in the period from July 2011 to July 2012. And while they increased slightly in 2008 to 2009, they remained quite low in comparison to long term averages. Except for a slight increase in the correlation of a couple of relationships, they remained in line with their longer term averages.

source: Bloomberg

I want to stress that while I believe these are high quality names that may benefit your portfolio, by no means am I suggesting that they should be the only holdings in your portfolio. It is always prudent to ensure that your portfolio is well diversified within the objectives and risk tolerances you and/or your financial advisor have established. If this sounds like a disclosure, well, it is.

Want additional names to add to your portfolio or replace one of the names mentioned? A notable favorite is in the technology consulting space. Accenture (NYSE:ACN), while not necessarily a technology company, is driven by technology investing. To read more, go to Accenture's Ascent in a Slow Growth Environment.

Disclosure: I am long GOOG, ACN, QCOM.