If you're invested in technology stocks, you've had a great ride lately.
With demand for Apple Inc.'s (Nasdaq: AAPL) products soaring, tech stocks will continue to do well.
Tech stocks have posted a whopping 16% return in 2012, the top performing sector in the Standard & Poor's 500 index. By comparison, the broader market has notched just a 9% gain year-to-date (YTD).
"Large-cap technology stocks have exceeded our expectations with better revenues, earnings, margins and cash flows," Michael Sansoterra, a sub-adviser for the Ridgeworth Large Cap Growth Fund, told The Wall Street Journal. "You just can't find that elsewhere in the large-cap growth space."
Tech Stocks Offer Bargains
Even as they march higher, prices for tech stocks are a relative bargain. The forward P/E ratio for the S&P 500 this year stands at 13.1, while the tech sector is just below that, at 13.0.
A number of household names have contributed to tech's stellar performance. Shares of International Business Machines Corp. (NYSE: IBM) have jumped 23% over the past 12 months and Intel Corp. (Nasdaq: INTC) is up 27%.
But the unquestioned star of the show has been Apple.
Bolstered by sales of iPads and iPhones, the high-flying company just posted one of the most profitable quarters ever, racking up $13.1 billion in earnings on sales of $46.3 billion.
Apple shares have more than doubled in the last 18 months and are up 34% YTD.
Incredibly, the tech bellwether's share price has skyrocketed 8,350% since 2003, as the late Steve Jobs engineered a comeback from the doldrums of the early 2000s.
In the process, Apple became the world's largest company with a market capitalization of $514 billion.
Apple's Influence on Tech Stocks
But the company's sheer size now has a huge influence on the markets.
Apple's market cap now accounts for 4% of the total market cap of all S&P 500 companies. On the tech-heavy Nasdaq, Apple has an even higher 16.6% weighting – more than Google Inc. (Nasdaq: GOOG), Intel and Amazon.com Inc. (Nasdaq: AMZN) combined.
The company's growing size means any large swings in Apple stock price have an outsized effect on the broader markets.
In fact, while the S&P technology sector had gained 9.8% through late February from its October 2007 high, it would have been down 4.1% without Apple, S&P Indices analyst Howard Silverblatt told Barron's. The S&P 500 itself is down roughly 13% since October 2007, but it would have been down 15.36% without Apple.
And there's reason to believe Apple's dominance will continue.
Apple is at the head of the class of the burgeoning mobile computing market, having sold more than 160 million iPhones since 2007 and more than 55 million iPads since its 2010 launch.
Apple also has a strong entry in the so-called cloud, for centrally storing and accessing data. The company has drawn an estimated 100 million customers for its iCloud service since its introduction last October, according to The Journal.
And with the release last week of the iPad3 — with a much sharper, clearer display and higher data speeds — Apple is likely to stay at the top of the tablet market.
Apple said that customer response to the new tablet has been "off the charts," and confirmed that the pre-order devices have sold out for the launch today (Friday), according to The Washington Post.
How to Play Apple Without Playing Apple
But the stock's meteoric rise to over $550 a share has given some investors pause. Many believe the stock's come too far too fast to dive in now.
"There are a lot of investors who would love to benefit from Apple's growth, as well as from its "Midas touch' with products," investment expertMartin Hutchinson said in a recent interview with Private Briefing. "But Apple's shares have climbed a very long way and appear pricey."
The alternative is to invest in a much smaller company that's benefiting from the same products and trends, he said.
Hutchinson recently identified one of the companies that supplies Apple with the digital-camera-sensor technology that is found on the iPads and iPhone 4S.
The same company is also in line to supply sensors for the upcoming iPad mini.
"The bottom line is that [the company's] shares could end up being a very cheap way to play Apple," Hutchinson concluded. "The shares are trading at a very low P/E, and it also has lots of cash – which will serve as a safeguard. You're looking at a small, cheap stock … and a company that is shaping up to be an important part of Apple's technological advantage."
This is the kind of expertise that is available exclusively to subscribers of Private Briefing.
Each day Executive Editor Bill Patalon talks to top market experts like Hutchinson, Keith Fitzgerald, Dr. Kent Moors and Shah Gilani. Each day they give him highly profitable stock recommendations.
Those recommendations have racked up 40 winners and 23 double-digit gains in less than six months.
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News & Related Story Links:
- Money Morning:
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- The Wall Street Journal:
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- Washington Post:
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- Money Morning:
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