The tech sector has been propping up this market of late. But cheap tech stocks still abound. Here are two with plenty of staying power.
Stock performance in this bear market has been very uneven. Some companies are getting crushed. Others are minimally affected. And some rare companies are actually thriving in this crashing economy, namely technology companies. But there are still plenty of cheap technology stocks out there. I’ll name you two in a minute.
In assessing the state of the current market, it’s important to realize that market indexes can be deceiving. Take the S&P 500, for instance. As of Tuesday morning, it is down 12.7% from the February high. But it’s only down that little because just five stocks account for 20% of the index. And they are all technology stocks. The median stock in the S&P 500 is down over 28%.
Those top stocks include Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOG) and Facebook (FB). Since the market high in February, those five stocks have an average return of -3.3%. As of the market close on Tuesday, the tech-heavy NASDAQ index was actually in positive territory year-to-date—and that is after it returned about 38% in 2019.
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The fact that technology stocks are propping up the index shouldn’t be surprising. It’s been going on for a long time. The Information Technology sector of the S&P 500 has been the index’s top-performing sector for the past 10-year, 5-year, 3-year, 1-year, and year-to-date periods. The outperformance is staggering. Technology has outperformed the NASDAQ by 239% in the last 10 years, 370% over the last five, and 388% over the last three.
Many talk about the Fed stimulus or low interest rates driving the market. That may play a part, but the main driver is technology. Without the Technology sector it would have been a lame bull market followed by a much more severe bear market.
The reason for the dominance of technology stocks is that we are in the midst of a technological revolution. Decades from now that fact will be much more obvious to historians than it is to us today. Technology is thrusting the world into a whole new era. And it is gaining momentum as cloud computing and the emergence of 5G technology take it to another level.
Going forward, there is a good chance tech sector performance will be even more dominant than it has been in the past. As the market struggles during this economic mess, there are great opportunities to buy good stocks cheap. The very best technology stocks should be first on your list.
Here are two good, cheap technology stocks that pay dividends.
2 Cheap Technology Stocks for the Coming Revolution
Cheap Technology Stock #1: Qualcomm (QCOM)
Qualcomm is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. In 2018, chips accounted for 76% of revenues while licensing from patents accounted for 23%.
But the main reason to buy Qualcomm now is 5G. It is far more than just an incremental advancement in cellular technology. It is a game changer that will tip the world into a whole new digital age. It will enable a new generation of technologies including self-driving cars, artificial intelligence, robotics and more. And it’s right around the corner.
Qualcomm is the undisputed king of the chips that will enable 5G technology. It makes the only good smartphone chip for 5G. Analysts estimate that the 5G chip set market will grow from $2.1 billion in 2020 to over $23 billion by 2026. Qualcomm has already partnered with 30 smartphone makers that will use its chips and equipment. And the new 5G-enabled phones will start hitting the market this year. Over 75 5G devices are either in the process of being launched or in development.
The new technology should be a huge boost to revenues and earnings. Consider this: The economy is crashing and semiconductor companies are notoriously cyclical. The company relies on phone set sales, which are way down during the recession. It also does a lot of business in China. Yet the stock is still down less than the overall market since the highs. What does that tell you?
The market knows that boom times are right around the corner. This is a stock that could inherit the post-coronavirus world. The stock is still cheap and it pays a solid 3.3% dividend yield. You could even target this stock to buy at a lower price in case the market sputters again before we’re out of this mess.
Cheap Technology Stock #2: Microsoft (MSFT)
Microsoft needs no introduction. It is the largest software company in the world and an absolute behemoth in the technology sector with nearly $140 billion in annual revenues and $1.36 trillion in market capitalization. Microsoft’s monopoly-like positions in its computer operating systems and office applications drive enormous growth in other areas.
The company is best known for its Windows operating systems and Office productivity suite. But its services are more far reaching. There are three main business segments. The business segment includes Microsoft Office, cloud-based Office 365, Skype and LinkedIn. Cloud services include cloud computing platform Azure and Windows Server OS. And personal computing involves laptops, desktop, and tablets as well as gaming consul Xbox.
Over the past five years, Microsoft has grown earnings by an average annual rate of better than 18%. That’s astounding growth for an industry behemoth. The stock has returned an average of over 30% per year over the same period.
How is Microsoft doing in this pandemic disaster? It reported first-quarter earnings at the end of April, reporting a 15% increase in revenue and a 23% rise in adjusted profits compared to last year’s quarter. The results were largely driven by the company’s huge presence in cloud computing. The company saw a 30% rise in commercial cloud computing revenues in the quarter, which now account for more than a third total revenues.
Microsoft’s subsidiary Azure, which offers cloud solutions that allow businesses to transfer IT solutions to the cloud, saw revenue growth of 59% year over year for the quarter. Azure is now the second-largest cloud services provider in the country.
And that revenue soared with only a few weeks of social distancing in the quarter. The trend will accelerate and working from home promises to be more prominent on a permanent basis after things return to normal.
The company is in stellar financial shape with over $137 billion in cash and only $63 billion in debt. The dividend is small with a 1.46% yield at the targeted price. But the company only has a 32% payout ratio and has raised the dividend in all the 16 years it has been paying a dividend, and by an average of 13.2%.
Do you think technology will become less of a factor or more of a factor going forward? I believe we are about to enter a new era in tech dominance. And Microsoft is a blue-chip company poised right in front of the trend and leading the charge.
Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.Learn More