Boring tech = Profitable tech

June 28, 2016 01:00 PM

This past earnings season had many high profile negative surprises in the tech space. Most notably Microsoft (MSFT) and IBM. These subpar results are a big reason why technology stocks have been the weakest performing industry group in the past three months.

As often is the case with a large sector like technology, if you dig deeper you will find pockets of strength that are worth further investment. And that certainly is the case here with the electronic parts distributors.

Truly, this is a turnaround story as the group had a rough time in 2014 and 2015. There we saw several quarters of earnings misses and declining growth. Gladly, the first quarter of 2016 looks like the turning point with future prospects looking much brighter. 

Now, let’s focus on the three best investment opportunities in the industry: 

Arrow Electronics (ARW): This is the largest and most consistent operational performer of the group as they only have one earnings miss in the past 10 quarters. Part of that is a heavier concentration in communications connection devices, which is a more consistent business these days versus power generation electronic devices, which are more tied to global construction. The most impressive part of Arrow’s most recent earnings announcement was signs of growth across all regions of the globe. That was an unexpected plus that analysts say points to greater gains ahead.  

Anixter International (AXE): Whereas Arrow is the model of consistency, Anixter has had a rougher go of it with five earnings misses in the past 10 quarters. Those stumbles led to 60% haircut for shares. The 14% earnings beat in Q1 has led to large increases in earnings projections for the future. When you combine higher earnings growth with a beat up share price you get an attractive value play as attested to be its Zacks Value Score of “A.” 

Wesco International (WCC): Wesco has travelled the same unfortunate path as Anixter the past couple of years. However, it actually suffered six misses in the past 10 reports. The good news is that it is turning the tide with three straight beats. Even with shares up 30% so far this year, it still carries a Value Score of “A” to go with Momentum Score of “A,” meaning it is both attractively priced and timely.  

Yes, there are many other technology niches that are more exciting, however, right now the fundamentals point to this being one of the best places in technology for investors to outperform the market. For those who would rather be profitable than exciting, these are the right stocks for you.

About the Author

Steve Reitmeister is the executive vice president at Zacks Investment Research at zacks.com. The cornerstone of the firm is the Zacks Rank stock rating system and its 26% average annual return since 1988. These results have been examined and attested to by the independent accounting firm Baker Tilley. @ZacksResearch