Thanks to the record business profits raked in during 2010 ($1.66 trillion) and a record amount of cash in corporate coffers (about $2 trillion), the spigots of capital flowing to technology are opening up. According to The Wall Street Journal, Gartner Research projects 5.1% growth in information technology spending to $3.6 trillion in 2011, with 9.1% growth in spending on telecom equipment and 7.5% growth in enterprise software and computing hardware.
This boost in corporate demand raises two important questions for the average investor: First, which companies will get the biggest share of that loot? Second, is the growth from that spending already reflected in their stock prices -- after all, the tech-heavy Nasdaq rose 12% in the fourth quarter of 2010 -- or is there more room for tech stocks to soar?
In my opinion, there's certainly room to rise -- for some of tech stocks. The trick is knowing which ones.
To screen out the cheap stocks from those that are overvalued, I like to use the price/earnings-to-growth (PEG) ratio. Stocks with PEGs below 1 look cheap to me, because their trailing P/E ratios are below their forecast earnings growth rates.
Here are the four companies that my calculations predict are best poised to help you profit from business's IT spending spree, ranked from the lowest PEG to highest:
Microsoft (MSFT) 0.61. This leader in enterprise software and gaming is trading at a P/E of 11.8 and its earnings are forecast to grow 19.5% by June 2011. Microsoft has exceeded earnings expectations in each of the last five quarters.
Cisco Systems (CSCO) 0.91. This leader in telecom equipment trades at a P/E of 15, and its earnings are forecast to grow 16.4% by July 2012. It has exceeded earnings expectations in each of the last five quarters.
IBM (IBM) 1.17. This leader in computing hardware, software and services trades at a P/E of 14.1, and its earnings are forecast to grow 12.1% by December 2011. It, too, has beaten earnings expectations in each of the last five quarters.
These companies are all expected to enjoy earnings growth that exceeds the rise in business spending on technology in 2011. The question for investors is whether these stocks will rise as the market recognizes the value reflected in their stock prices.
Of course, in the short-term, the key is to evaluate whether they'll exceed investors' expectations when they report their earnings for the first quarter of 2011. If so, their stock prices are likely to pop. If the past is any indicator, each of these four is likely to deliver a market-beating performance when it next reports earnings.
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