Time to Stack Your Deck With Tech Stocks
On Nov. 9, the day after Donald Trump was elected president, the stock market exploded.The Dow added 257 points after diving nearly 900 points overnight.
And on hopes of tax cuts, infrastructure spending and industry deregulation, the market’s biggest laggards quickly became the stars of 2016: financials, materials and health care stocks.
Furthermore, the market’s strongest sector by far — technology — fell 3% in the week after the election, while the S&P 500 rose 2%.
It was quite a reversal.
But as this earnings season — the first of Trump’s presidency — has proved so far to investors, it doesn’t always pay to jump the gun…
According to data from the number crunchers at Bespoke Investment Group, 73% of tech stocks beat analyst earnings estimates.
That’s eight percentage points higher than the current beat rate for all stocks (65%).
And FactSet notes that 72% of tech firms in the S&P 500 beat revenue estimates, too.
These results have investors thinking twice about running for the exits on tech…
Sellers Remorse?
Since the start of the year, XLK — the ETF that tracks large-cap tech stocks — is up 14%. That’s twice the gain of the S&P 500 over the same period.
What about the “Trump trade” darlings of late 2016?
Not so hot…
Health care names have gained 10% on the year. But materials have gained 5%, and financials are up less than 1%.
While it’s true that many individual tech stocks sport hefty valuations, the tech sector at large trades at just 18 times forward earnings — 25% below the S&P.
And with billions in cash on hand, tech firms will continue to reward shareholders with buybacks, dividends and takeovers that supercharge growth.
Better still, if you were one of the hasty investors who dumped their tech stocks for Trump trade stocks… you’re in luck.
Here’s a small-cap tech name that could help supercharge your 2017 returns…
Cleaning up Shop
Ultra Clean Holdings Inc. (NASDAQ: UCTT) is a tech firm that specializes in manufacturing semiconductor capital equipment.
Put simply, Ultra Clean makes the machines that tech device-makers use to craft semiconductor components for their products.
And though the company is a rising star in the semiconductor manufacturing space, Ultra Clean is still one of the smallest — boasting a market cap of just $ 750 million.
After a prolonged downturn in the semiconductor industry, business is now booming…
The company booked $ 205 million in revenue in the first quarter — a 69% increase from the same period last year.
For the full fiscal year 2016, sales rose 20% from the previous year, to $ 563 million.
Management reported adjusted earnings of 47 cents, versus analyst estimates of 42 cents. That represents an upside surprise of 12%.
Ultra Clean trades at 0.9 enterprise value to sales — a 74% discount to the peer average.
Shares also trade at 11.8 times forward earnings — a 41% discount to the industry (19.9) and 62% below tech stocks overall (30.9).
And fiscal 2017 earnings are forecast to nearly triple from last year.
In fact, the stock could easily add another 10% through the end of the year simply by applying the stock’s five-year P/E multiple (13.3) to full-year earnings.
Over the last year, shares have soared to an all-time high as Ultra Clean’s fundamentals improve.
The stock is up 309% over the last year. That’s eight times small-cap tech stocks and 13 times the rise of the S&P 600.
In short, the company is on fantastic financial footing, and the stock is in a solid uptrend.
Bottom line: Tech stocks are primed to soar this year as earnings improve and investors rush to buy back shares they sold off after the election. And Ultra Clean represents one of the sector’s hottest momentum stocks, backed by a rock-solid balance sheet.
