S&P recommends overweighting the S&P Information Technology sector. Year to date through November 18, the S&P Information Technology Index, which represented 19.6% of the S&P 500 Index, was up 0.7%, compared to a 3.3% decline for the 500. In 2010, this sector index rose 9.1%, versus a 12.8% advance for the 500. There are 15 sub-industry indices in this sector, with Computer Hardware being the largest at 19.8% of the sector’s market value.
S&P equity analysts have a neutral fundamental outlook on the sector, given concerns related to economic growth, but note very low valuations, reflecting major global concerns, largely centered on Europe and sovereign debt and China and growth. We think strong and flexible balance sheets will be increasingly employed to generate value through internal investment, stock buybacks, dividends and M&A. Lastly, we also see the possibility for activity and momentum for comments and legislation about the repatriation of foreign earnings, which has been mentioned by some presidential candidates and members of Congress. According to Capital IQ, the sector trades at a P/E on consensus estimated 2012 EPS of 11.4X, slightly above the 11.3X for the S&P 500. Its P/E to projected five-year EPS growth rate of 0.9X is below the broader market’s PEG of 1.0X. This sector’s marketweighted S&P STARS average of 3.7 (out of 5.0) is lower than the 3.8 average for the S&P 500.
The S&P GICS Information Technology Index is consolidating after breaking out from a bullish, double-bottom reversal pattern in October. We believe the intermediate-term trend is now bullish. In addition, prices have jumped above the declining trend-line, drawn off the July highs, further confirmation of a bullish trend change, in our view. Prices are holding nicely above both the 17-week and 43-week exponential averages, and the shorter average has crossed back above the longer average, so this moving average crossover system is now on a buy signal. The sector is very close to its bull market highs from February in the 440 region, and a break above this area would be bullish, in our opinion. Relative strength versus the S&P 500 recently broke out of a large base to new recovery highs. Our technical opinion on Information Technology remains bullish.
We believe low valuations, competitive EPS growth and a bullish technical outlook, should fuel alpha.
Intel is the largest chipmaker in the world. It develops and manufactures microprocessors and platform solutions for the global personal computer market. Intel pioneered the x86 architecture for microprocessors. Intel is in excellent financial shape. At the end of the third quarter of 2011, the firm had $10.9 billion in cash and short-term investments compared with $7.1 billion in debt. Intel continues to go full throttle and has laid out aggressive plans to introduce new chip architectures every two years, in an effort to widen its lead over AMD in the processor performance race. The firm recently launched its Sandy Bridge chips, which combine both computer and graphics processors onto the same silicon, and has begun to further push the envelope of semiconductor fabrication technologies, as it ramps up manufacturing of cutting-edge, 22-nanometer (circuit size) chips. INTC has a dividend yield of 3.44% and continues to increase dividends each year.
Seagate Technology’s (STX) fiscal first-quarter results confirmed that demand for the firm’s hard drives is still growing, albeit slowly, and that pricing is holding up well. Seagate shipped 50.8 million hard drives and generated $2.8 billion in revenue during the quarter, which compares favorably with the 49.2 million units and $2.7 billion shipped in the first quarter of last year. STX has a dividend yield of 4.46%/
Here is a list of information technology companies with a bullish sentiment and high dividend yields.