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Why Tech Stocks Are Where You Should Be   by George Leong

The second-quarter earnings season has started strong. As of July 20, 88 of the S&P 500 companies have reported, with 78% beating estimates and 10% falling short, according to Thomson Reuters.

Strong earnings from technology have provided the catalyst for the buying, helping to offset the significant debt issues in Europe and the U.S.

As was the case in the first quarter, there are some high hopes of seeing revenue growth in addition to earnings acceleration as the economy recovers. Whether they are penny stocks, micro-cap stocks, or blue-chip stocks, you want to see growth.

In my view, the key in the second quarter and beyond will continue to be the ability of companies to report higher revenues, which is what you want to see during an economic recovery, as it indicates increased spending.

The reality is that earnings can be made to look better via cost cuts and control. In addition, watch for guidance going forward, as this will also be a key factor.

Two key sectors will be technology and banking. Traders are looking for leadership from these groups.

The NASDAQ has been stronger and I continue to believe that the technology area will be a critical area, since this sector has provided much of the leadership over the last several years.

Big-name technology continues to look positive.

We saw an impressive blow-out quarter from Intel Corporation (NASDAQ/INTC), which was the big winner after blowing away Street estimates on it second-quarter revenues and earnings. The strong results from Intel are critical, as they indicate strong chip demand.

Technology companies also delivering better-than-expected results were International Business Machines Corporation (NYSE/IBM) and Google Inc. (NASDAQ/GOOG).

The area to watch for in technology will be mobility applications for tablets and smart phones, as users shift away from the more cumbersome PCs and laptops. Apple Inc. (NASDAQ/AAPL) is the “best of breed” in my view. The maker of the “iPhone” and “iPad” soundly beat on record revenues and earnings per share (EPS). The stock surged to nearly $400.00. And, while I’m impressed with the results, I’m somewhat wary of the Q4 forecast. Peter Oppenheimer, Apple’s CFO, estimates revenues of around $25.0 billion and earnings of $5.50 per diluted share in the fourth quarter. The numbers are well down from the Q3 and below the consensus estimate of $6.42 per diluted share on revenue of $27.70 billion. Watch this.

Research In Motion Limited (NASDAQ/RIMM) launched its “PlayBook” tablet, but, based on the sales results so far, Apple has nothing to worry about.

In banking, Bank of America Corporation (NYSE/BAC) was short on adjusted EPS and reported a 54% year-over-year decline in second-quarter revenues. The results are disappointing, especially after good results from Wells Fargo & Company (NYSE/WFC), JP Morgan Chase & Co. (NYSE/JPM) and Citigroup, Inc. (NYSE/C). The problem with BAC appears to be more bank-specific and due to massive litigation charges.

These are just some of the companies and areas to watch for during this second-quarter earnings season.

As I have said, the key will be revenues, especially organic growth. We want to see revenues grow to drive earnings instead of cost cuts. Without revenues growing, it is difficult to imagine a healthy economy and this is my concern that could hamper growth.

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