BOSTON (TheStreet) -- In an accelerating economic recovery, technology stocks tend to outperform. But the popularity of the sector is deterring many investors. Momentum technology stocks, such as F5 Networks (FFIV), which plunged 23% last week, are volatile. Still, technology is the highest-rated U.S. sector for 2011, based on analysts' mean ratings. Researcher Jefferies favors the following six stocks, which it expects to outperform the market over 12 months. Below, they are ordered by predicted upside, from plenty to most.
6. Microsoft (MSFT) is the world's largest software company. It is a safe technology investment because of its discount valuation and resilient customer base. The Dow component sells for a trailing earnings multiple of 10, a forward earnings multiple of 10, a sales multiple of 3.7 and a cash flow multiple of 9.2, 66%, 55%, 69% and 51% discounts to software industry averages. The stock's PEG ratio, its trailing P/E divided by analysts' long-run growth forecast, of 0.7 reflects a 30% discount to estimated fair value. Its trailing P/E of 11 represents a 32% discount to the five-year average. A 41% operating margin ranks in the 98th percentile for the software industry.
Jefferies is bullish on Microsoft, rating it "buy" with a $33 target, implying 16% of upside in the next 12 months. The bank's last research note applauded the company's move to make future Windows versions compatible with ARM-based systems, those used by low-power electronics devices, including smart phones and tablets. Microsoft is also working to build support for other applications, including Office and Quicken, to run on ARM chips. The company provided a 24 to 36 month cycle for the release of its next Windows version, so this update won't have a near-term impact on results. Microsoft also disclosed that eight million Kinect devices sold in 60 days, easily beating Jefferies' forecast for five million units. Kinect is a hands-free add-on for the Xbox 360 gaming console.
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