High Tech Is Running Hot

 | Oct 27, 2011 | 11:30 AM EDT
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The economy might struggle, but that does not mean every industry is having a tough time getting up a head of steam -- take the tech industry, for instance.

Barron's recently interviewed Doug Ramsey and Steve Leuthold of Leuthold Weeden Capital Management. Ramsey commented:

I am intrigued by the action in the technology sector throughout this correction. Those big Nasdaq stocks, on the whole, tend to underperform in a declining market, but they have held pretty firm. The 10 largest tech stocks are down to about 10x cash flow.

Leuthold is also generally upbeat about the industry:

One concern with the tech group is that their record profit margins are beginning to fade some. On the other hand, they are cheap.... There is lots of liquidity.

He goes on to note that many tech companies get more than half their earnings overseas, making them a global play and not just a domestic one, which is also a factor in their favor.

And recently the California Employment Development Department released data that showed Silicon Valley's year-over-year job growth to be highest for any area in the state. Tech companies in the Valley are hiring at an impressive rate.

The research I do for my website, Validea.com, includes assembling industry portfolios and tracking their performance. I cannot help but notice how charged the tech industry is. In the past month, while the S&P 500 returned 5.7%, Validea's portfolio of tech industry names was more than 2.5x higher, with a 15.2% return. And as Ramsey noted, some of these nerdy bastions are reasonably priced if not cheap.

Quality Systems (QSII) is one of the stocks in my technology portfolio worth considering. The company markets computer-based practice management and electronic health records systems for medical and dental group practices and hospitals throughout the U.S. It sells its systems through its NextGen Healthcare subsidiary, and the federal government is making a big push to computerize health care records.

The strategy I created from the writings of Martin Zweig gives Quality Systems a clean bill of health. It favors the fact that the company's revenue growth (23.40%) exceeds earnings growth (16.24%), which means that earnings are growing not just through cost-cutting or other non-sales measures. Also, earnings growth is positive when compared to year-earlier figures, and debt is as low as it can be (namely, zero).

In addition to the Zweig strategy, my Warren Buffett-based strategy is also positive concerning Quality Systems. In the company's favor: Earnings have increased in each of the past 10 years, no debt, high average return on equity (25.4% over the last decade) and high average return on total capital (25.4% during the last 10 years). In addition, the strategy projects a 12.6% rate of return on the stock for investors over the coming decade.

Kulicke & Soffa Industries (KLIC) is not a high-tech company, but it services the technology sector by manufacturing semiconductor assembly equipment and providing packaging solutions for semiconductors. I use a strategy I based on the writings of Peter Lynch, and it likes Kulicke & Soffa. This strategy's most notable variable is the P/E/G ratio, which looks at the P/E ratio relative to growth and limits the upper allowable range to 1.0. Kulicke & Soffa's P/E/G is a very low 0.08, based on a P/E of only 3.95 and a growth rate of 47.14%, which is the average of the three-, four- and five-year historical growth rates, and the company has fairly low debt, which is also a favorable sign. This is a solid company with a well-priced stock.

Also worth considering is OmniVision Technologies (OVTI), which develops digital imaging technologies used in mobile phones, notebooks, tablets, webcams, digital still and video cameras, medical imaging systems and other devices. Similar to Kulicke & Soffa, OmniVision is in the picture because the Lynch strategy favors it. What there is to like is a strong P/E/G ratio of 0.27 and very low level of debt, which places it in the same category of desirable investment as Kulicke & Soffa.

Tech has been doing well for some time. Among major industries, it is high on the list of strong performers. Any of these companies would be solid additions to your portfolio.

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