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You Tube and flat-panel TVs are hot. The companies that make the chips and software powering that heat are decidedly not.
Or at least they weren't until late July. Since then, the Nasdaq Composite Index ($COMPX), a fair proxy for technology stocks, has jumped 7%.
I think there's plenty more room for those stocks to run, as the recent rally has only started to make up for a 13% dive these stocks took earlier this year.
So I've found five tech stocks worth buying now. But before we take a closer look at those five, let me explain why I think industry as a whole will continue its revival.
The consumer ain't dead yet. The economy sputtered last quarter and housing sales hit the wall in July. So investors now worry that consumers won't earn enough to keep taking home high-tech gadgets like flat-panel TVs, video game consoles and digital cameras.
But these fears are unfounded, believes James Paulsen, the chief market strategist for Wells Capital Management.
Yes, housing is weak. But other sectors -- including manufacturing, services and commercial construction -- are fine, so job growth is solid. Plus, people are working longer hours and getting paid more. This explains why personal income is growing at a robust 6.5%. That income growth is picking up the slack where home construction and mortgage refinancing left off.
Paulsen expects the economy to stay firm for three reasons:
1) Borrowing costs are still at historic lows even though the Fed has hiked rates 17 times;
2) The dollar is weak, which makes our goods look cheaper overseas, where robust economic growth supports demand for our products.
3) U.S. companies have a lot of money in the bank. "Why should job creation suddenly hit the wall when businesses are so profitable?" asks Paulsen. "We are not convinced the economy has entered a persistent period of weaker growth."
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Scandals are overblown. The dubious practice of backdating options so that execs could cherry-pick the best prices was rampant in the tech sector. So investors are avoiding the whole group. Much of the bad news, however, may be out, and tech stocks may rise as worries about the scandals subside. "At some point people are going to look past all this," says Kalpesh Kapadia of Indusino, a hedge fund that invests in tech stocks.
A change of season. Investors know that tech stocks normally do poorly from August through the middle of October. So they won't go near the group now. But this year it may be different -- exactly because so many people have already placed a big negative bet on tech. The tech bears have established historically high short positions. This means they've borrowed tech stocks and sold them, hoping the stocks will decline so they can replace them later at a lower price. But with short positions so high, any more weakness in tech stocks could be offset by short sellers buying back tech stocks to cover their bets. "The short interest could soften the blow of a market pullback," believes Phil Erlanger of Phil Erlanger Research, which tracks the level of short positions.
Now, to the picks:
Cisco Systems
If there is a slowdown in tech, somebody forgot to tell Cisco Systems (CSCO, news, msgs) chief exec John Chambers. Not only did his company beat Wall Street estimates last quarter and guide earnings estimates higher, but Chambers also confirmed that he plans to continue beefing up his sales force to meet increased demand for his company's routers, switches and optical gear that help the Internet hum.Popular consumer products like Internet-based phone calls and video are putting a strain on the Web's backbone. And companies are using networks more to run Web-based software applications that help customers do everything from filling forms to checking on account balances. To do so, they need to replace outdated gear.
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