The Technology sector has been a leader this year, the total return, year to date (10/05/2012), was 26.28%, while the appreciation of the Russell 3000 index in the same period was 15.91%.
Stock Sectors' Total Returns, Year to Date, are shown in the table below (Data through 10/05/2012):
Nevertheless, there are some important tech stocks that, for one reason or another, have fallen out of favor, but are starting to show some strength. However, in order to find such stocks, a technical analysis with an RSI indicator can be of great assistance for investors.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a basis for further research.
The screen's formula requires all stocks to comply with all following demands:
- The stock is included in the Russell 3000 index. Russell Investment explanation: "The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected."
- Price to free cash flow is positive, (many investors prefer using free cash flow instead of net income to measure a company's financial performance, because free cash flow is more difficult to manipulate. Free cash flow is the operating cash flow minus capital expenditure).
- Total debt to equity is less than 0.9.
- RSI (14 days) is above 30 and RSI (14 days) was below 30 in one of the last 2 days. (The Relative Strength Index [RSI] is an oscillator that measures current price strength in relation to previous prices. The classic way to interpret RSI is to look for oversold levels below 30 and overbought levels above 70. When the RSI crosses above the oversold line (30) it is considered buy signal).
I used Portfolio123's powerful free screener to perform the search. After running this screen on October 06, 2012, I obtained as results the 4 following stocks:
Dell Inc. (DELL)
Dell Inc. provides integrated technology solutions in the information technology industry worldwide. It designs, develops, manufactures, markets, sells, and supports mobility and desktop products, including notebooks, workstations, tablets, smartphones, and desktop PCs, as well as servers and networking products.
Dell has relatively low debt (total debt to equity is 0.87) and its price to free cash flow for the trailing 12 months is very low only 6.58. The company has a very low forward P/E of 5.37. Dell pays a dividend, and the forward annual dividend yield is very high at 3.31%. The company is trading 47% below its 52-week high and has 48% upside potential based on the consensus mean target price of $14.27 for the company. All these factors make the stock quite attractive.
Fortinet Inc. (FTNT)
Fortinet is a worldwide provider of network security appliances and the market leader in unified threat management. Their products and subscription services provide broad, integrated and high-performance protection against dynamic security threats while simplifying the IT security infrastructure.
Fortinet has no debt at all and its price to free cash flow for the trailing 12 months is 26.2. The average annual earnings growth for the past 5 years has been very high at 46.84% and the average annual earnings growth estimates for the next 5 years is also very high at 19.07%. The company is trading 16.4% below its 52-week high and has 24% upside potential based on the consensus mean target price of $29.9 for the company. All these factors make the stock quite attractive.
Integrated Silicon Solution Inc. (ISSI)
ISSI is a technology leader that designs, develops, and markets high performance integrated circuits for the following key markets: automotive, communications, digital consumer, industrial, medical and military.
ISSI has no debt at all and its price to free cash flow for the trailing 12 months is quite low at 11.88. The average annual earnings growth for the past 5 years has been very high at 30.7% and the average annual earnings growth estimates for the next 5 years is 13.5%. The company has a very low forward P/E of 8.65 and a very low PEG ratio of 0.43. Among the six analysts covering the stock, two rate strong buy and four rate buy. The company is trading 19.5% below its 52-week high and has 36% upside potential based on the consensus mean target price of $12.58 for the company. The ISSI stock seems to be a good investment right now.
Power Integrations Inc. (POWI)
Power Integrations, is the leading supplier of high-voltage analog integrated circuits used in power conversion. The company says that its integrated circuits enable compact, lightweight power supplies that are simpler to design and manufacture, more reliable, and more energy-efficient than those made with competing technologies.
POWI has no debt at all and its price to free cash flow for the trailing 12 months is 17. The average annual earnings growth for the past 5 years has been very high at 30.2% and the average annual earnings growth estimates for the next 5 years is 14.5%. The company is trading 30.1% below its 52-week high and has 32% upside potential based on the consensus mean target price of $41 for the company. The POWI stock seems to be a good investment right now.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ISSI over the next 72 hours.