Get Ready for Tomorrow With These Tech Stocks

So far in 2014, the S&P 500 hasn’t done much but vacillate between slight gains and slight losses. And that can make it difficult to position our portfolios in a manner that captures the upside potential of the market while simultaneously diversifying our assets to minimize risk.

If we look at the return of the entire market through the lens of individual sector returns, though, the true nature of return drivers becomes clearer. We see that, just like last year at this juncture, it is truly the defensive sectors of health care and utilities that lead the pack.

That’s not a great sign for overall market bulls, like me (I remain convinced that the S&P will rise on the order of 10 percent or so in 2014), at least in the short term. And it’s not a move that spells success for the pro-cyclical sectors that I think can rebound and lead the market as the global economy continues to expand in the year ahead.

Still, at least one pro-cyclical sector, technology, is showing some signs of emerging leadership right now — even if that leadership is nascent at the moment.

The tech sector is lagging health care and utilities, but it is showing signs of emerging leadership now

Tech is lagging health care and utilities, but this sector is a very important one for the U.S. and global economies, and one where I think outperformance signals more than just a momentum play (like I see in the other two sectors, in general). So when it is showing some signs of strength, it is worth paying heed to it for shorter-term positioning decisions.

The way I stay out of trouble when investing in any sector, as you know, is to faithfully follow the indications yielded from the discipline of the Weiss Ratings Model. This tool gives me a heads-up when individual stocks look risky as well as promising, and has been very valuable in my search for market-beating positions over the past 10-plus years.

While I would not fault anyone for sticking to “what works” best in the immediate term, investors whose horizons are longer than a couple of weeks can be well-served by exploring opportunities in what I think is an up-and-coming sector. Tech is that in spades at the moment, in my view.

For separating the wheat from the chaff in this admittedly difficult sector, I fall back once again on the Ratings Model’s rankings to find stocks that look the most promising in both the near- and the longer terms. Right now, there are no A+ stocks from tech in the Ratings Model’s overall set. And that’s a bit concerning, since it is the only sector where that is true — save for telecom, but that’s a story for another day. (That sector is the absolute bottom of the barrel in 2014.)

However, I’ve found that if we can identify individual firms that are on the upswing, ratings-wise, before the market catches wind of them, we can successfully position in the strongest stocks for tomorrow — the stocks that everyone will want to buy once the uptrend is confirmed.

For the tech sector, one issue I see for many investors is that many of the most highly rated stocks are also small capitalization and thus outside the discipline of non-specialized investors. But there are a few in the A-rated category that I think deserve notice from investors today:

ePlus (PLUS) is an A-rated small cap (about $450 million in market cap currently) that tops the charts of tech choices as of today’s Ratings Model run. I think it’s most suitable for intrepid investors who don’t mind taking small positions, then adding to them, as it trades only about 22,000 shares per day. The firm sells top branded products on the hardware and software sides of the IT sphere, with a portion of the firm devoted to financing those purchases. It sells to government bodies, schools, hospitals and in other areas where a personal touch makes a difference to buyers.

Another highly rated stock that might be a little bit more appropriate for a wider range of investors is Electronics for Imaging (EFII). This stock has done well over the past year (up close to 80 percent over the period), and still has room to run, in my view. Its business is digital printing for the enterprise, with solutions fitting most customers’ demands with off-the-shelf products. However, it will customize its services to meet the demands of more difficult jobs, and its client list reads like a who’s who of businesses in banking, advertising and consumer packaged goods, among others.

Another stock I think can handle widespread investor optimism (i.e. it trades a lot) is Synaptics (SYNA). SYNA’s business is integrated into many electronic devices. It makes touchpad devices (like the pad on your laptop or smartphone) work. It sells its wares primarily in Asia (all the major countries) but also in the U.S. Though the business of consumer-facing technology is a tough one, this is a firm that has its products spec’d in to many of the most popular devices around. It has had a bit of a strong run recently, so I’d watch the stock for signs of weakness before pouncing, but I think it is the type of intellectual-property heavy concerns that will stand the test of time.

There are a couple of other companies in between SYNA and this next firm, which are household names to avid investors (if you pay attention to the peripheral devices going into your computers, like SanDisk (SNDK), a storage device firm, and Cognizant Technology (CTSH), which may be providing consulting services to your employer), but one more from the list of top-rated stocks I think deserves immediate attention is Qualcomm (QCOM). Its chips go into most smartphones and other communications devices sold on the market today. Although the stock’s ride has been bumpy at times over the past few years, it is a clear market leader — a large cap stock that can give upside potential and the confidence to hold on for some time to come.

You’ll notice that these names are not yesterday’s tech stocks, and that’s the main value of using a tool like the Ratings Model — uncovering stocks that you otherwise may never have heard of. Sometimes, getting in on a good thing before the rest of the market is even aware of it is the best road to tremendous profits.

Best,

Don Lucek