Ride Big Tech to Big Gains in Back Half of 2012

Editor's note: As part of our partnership with Nightly Business Report, Jill Malandrino of TheStreet's Options Profits joined NBR Monday (see video and transcript here) to reveal her trading outlook for the remainder of 2012.

NEW YORK (TheStreet) -- Here is a common dilemma for many investors: We all want to earn higher returns but are afraid to commit capital as the market continues its grind higher. Believe it or not, this is actually a product of a bull cycle.

Investors keep their money in cash or low-yielding money markets and bond funds for fear of "missing the bottom." It's totally understandable as we are inundated with shaky macroeconomic data and global headline risk. Yes, there is plenty of reason to be concerned about macro measures, and we are not out of the proverbial woods, but let's take a step back and review the first quarter of 2012.

The S&P 500 finished up over 12%, and that's outstanding for just one quarter of performance. Should we break out the bull-market party hats? No. We expect second-quarter choppiness, especially with the "Sell in May" psychological overhang. But the corrective action and consolidation we have seen is a good thing (as Martha Stewart would say).
Word on the Street

And don't forget that the Federal Reserve has an arsenal of quantitative easing tools in its war chest should data results get strained. Not that trading and investing should be predicated on that, but as we have seen, fighting the Fed and the tape has not exactly worked out. As we say in trading, the trend is your friend!

Is it too late to put some cash to work in the equity market? Absolutely not. Fundamentally and technically, the back half of 2012 is lining up for some nice returns, and now is an attractive time to get in. Current stock prices represent attractive entry points into the end of the second quarter, as expectations were for less-than-stellar quarterly corporate earnings, but, in fact, results and guidance for the third quarter and the second half have been quite good.

Of the 297 S&P 500 companies that reported earnings as of April 27, 57% are beating top-line forecasts, while 73% are surprising on the bottom-line. Yes, we saw some profit taking as investors wanted to reap some rewards for being patient. But that was met with fresh buyers looking for cheaper levels to get involved.

In addition to attractive stock-price entry points, U.S. economic data is notably stronger in 2012 compared to the last 4% correction in 2011. Housing starts and home-price trends are coming in at levels better than 2011, as are auto sales. First-quarter consumer spending grew at an annualized rate of 2.9%, the fastest since the end of 2010. Finally, non-farm payroll data is trending higher as well, up 29% from the same situation last year.

There is some concern that this Friday's jobs number may be a bit weak, and that will certainly apply pressure to the market. If that is the case, I would take the opportunity to pick up some quality shares of healthy companies that got smacked around as a result of trading in sympathy with the market. If the data is good and the market catches a bid, I would still get involved and ride the momentum, because levels are that attractive.

So where do you put some money to work? Recall that when I was on Nightly Business Report on January 30, I argued that tech stocks could lead a market comeback -- and what a year that sector has had! As of Friday's close, Information Technology still tops the other sectors of the S&P 500 with a 19.8% advance year-to-date. The best of the large-cap tech names have stellar balance sheets with tons of cash, executing on all metrics. And the best part is they continue to reward investors by putting that cash to work with share buybacks and dividend increases.

One of my favorite stocks in the large-cap tech space continues to be International Business Machines ( IBM). It reported earnings on April 17 and beat and raised its full-year guidance. It also increased its buyback program to $7 billion and simultaneously announced a 13% increase in its quarterly dividend to $0.85 per share. The stock took a hit after the report, but as I mentioned earlier, investors and momentum traders took profits as the stock had already rallied more than 11% year-to-date headed into earnings. I don't believe the stock is priced for perfection, at least in terms of management's forecast, and would continue to buy at these levels.

IBM is using acquisitions to grow its software and services vertical, which comprises 80% of its business. The company is still shopping for analytics firms, as its latest M&A conquest is said to be Vivisimo, which develops software that enables enterprises to discover and analyze data from disparate sources. First-quarter analytics revenue for IBM realized a 14% year-to-year increase. So not only is IBM proving its worth as a market leader, it is still focused on growth.

This combination of market dominance and growth potential makes IBM a great stock for a core portfolio holding, as you will likely see price appreciation while IBM's healthy dividend program rewards you for holding a quality name.

-- Written by Jill Malandrino in New York.

More from Opinion

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Latest Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Elon Musk's Twitter Tirade Is the Dumbest Thing on Wall Street

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Why Google's Search Momentum Won't Be Badly Hurt by New EU Rules

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Time to Talk Tesla: What Happened This Week, Elon?

Time to Talk Tesla: What Happened This Week, Elon?