Time to Rotate Into Technology

 | Mar 14, 2013 | 11:00 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

d

,

csco

,

glw

,

iaci

The Dow eked out its ninth straight gain Wednesday and the market is now up some 10% for the year. Even the European bourses have recovered to levels of June 2008. In some ways, it is an unusual rally as defensive sectors such as utilities, consumer staples and health care easily outperform more traditional higher beta/growth sectors such as technology. One anomaly that fascinates me is the performance discrepancy between utilities and technology. Over the last three months, the utility sector has doubled the performance of the technology sector (see chart).

In an economy that is growing, this outperformance appears illogical, and I do not believe the discrepancy can continue; in fact, I believe it will reverse. Investors seeking safety in the middle of a rally have driven the utility sector to a higher multiple than the overall market, even as dividend yields within the sector are paltry by historical standards. The utility sector is highly regulated and projected growth rates are hardly robust. For example, Dominion Resources (D), one of core positions in the Utility Select Sector ETF (XLU) yields 4%. It also sells at about 16x forward earnings with projected revenue growth of just 3% annually over the next two years. Compare this to tech stalwart Cisco Systems (CSCO). The network giant does pay a slightly lower dividend of 2.6% but sells at a much lower forward price-earnings ratio under 11x, and it is projected to grow sales by more 5% in both 2013 and 2014.

As the rally continues, investors should think about rotating to higher-growth areas like technology. Stocks in the sector have also changed drastically over the last decade. The sector is now priced at below the overall market multiple and has provided some of the strongest dividend growth of any sector over the last few years. Even Apple (AAPL) pays a 2.5% dividend, something Steve Jobs resisted during his time at the helm of this tech giant.

Investors should consider moving funds into technology from utilities or other defensive sectors. There are myriad tech stocks that have low valuations, offer decent dividend yields and should provide better earnings and dividend growth prospects than what the utility sector currently provides. Here are two tech stocks with those traits I like here.

Corning (GLW), the maker of specialty glasses and materials, is selling at around 11x this year's earnings projections, has no debt and provides a solid yield of 2.8%. It should grow revenues at around 5% in 2013 and 2014, and the stock sports a five-year projected price-earnings-growth ratio of less than 1 at 0.89.

IAC/InterActiveCorp (IACI) operates websites such as Match.com, Ask.com, About.com, and OurTime.com. The stock has been a disappointment over the last six months, primarily due to concerns around its search revenues. However, the market is undervaluing its growth prospects. The company should grow revenues in the double digits both this fiscal year and next. The stock yields 2.2% and is priced at under 12x this year's projected earnings. It also consistently beats earnings expectations as it has bested consensus estimates each of the last six quarters.

Columnist Conversations

Using this year's estimate to make a P/E is pretty standard. Basing a multiple on 2015's projected EPS is not ...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.