8 Big Technology Stocks Leading the Market

BOSTON ( TheStreet) -- Shares of some of the biggest technology companies are on the run this year, with returns averaging better than triple that of the S&P 500. The leaders cater to big corporate customers and firms that provide cloud computing services.

And that grouping excludes everyone's current favorite, iPhone and iPad maker Apple ( AAPL), which is up 64% this year.

S&P recommends that investors overweight the information-technology sector. Its S&P Information Technology Index, which represents 19.6% of the S&P 500, was up 20.1% through Sept. 10, compared to a 13.6% gain for the 500.

"Despite our concern about a weaker global economy given the sovereign debt issues in Europe, we see strong demand for data storage driven by increased usage of electronic recordkeeping and growing interest in cloud computing," S&P said. "We also project better sales of PCs in the second half of 2012, due in part to the launch of ( Microsoft's ( MSFT)) Windows 8."

But S&P Capital IQ's equity analysts have a "neutral" outlook on the information-technology sector as they expect third-quarter earnings per share growth to slow to 3.4%, half that of the second quarter, but say the weakness should be temporary and be offset by a "re-acceleration in second-half sector EPS growth, reasonable valuations, and strong and flexible balance sheets, which we think will increasingly be employed to generate value through internal investment, stock repurchases, dividends and mergers & acquisitions."

And they add that the sector is still cheap, as it trades at a price-to-earnings (P/E) ratio of 13.3 for 2012, based on analysts' consensus estimates, which is below the 13.7 for the S&P 500.

But that's not to say that all big tech firms are a good bet. The leading chipmaker, Intel ( INTC), cast a pall on the sector last Friday when it cut its third-quarter revenue outlook by $1 billion, citing growing competition for laptop computers, from smartphones and tablets.

And shares of one of the world's largest personal-computer makers, Hewlett-Packard ( HPQ), are tanking, having lost 31% this year, including 20% in the past three months.

On Monday, HP said it will cut up to 29,000 jobs, an increase of 2,000 from prior estimates, as it seeks to restructure, which will result in charges of about $3.3 billion through the end of its 2014 fiscal year, and another $400 million in charges relating to real estate consolidation.

And the much-hyped shares of the social media site Facebook ( FB), which opened with a stock price of $38 and reached $45, are now selling at $18.80.

Investors also got a scare two weeks ago when Autodesk ( ADSK), a leader in the computer-aided-design industry, reported disappointing second-quarter results and lowered its outlook for the year.

But companies with big corporate customers and those tied to cloud computing, which refers to remote users' access of computing resources over the Internet, are continuing to see interest from investors with a long-term view in anticipation of an economic recovery.

Oddly enough, one of the top-performing stocks this year, with a gain of 92%, is an old-school computer hard-drive maker, Seagate Technology ( STX).

Its gains are driven by investors' anticipation of a big jump in hard-drive prices. S&P expects a rebound in the industry, following the flooding in Thailand where many factories are located. "Although we expect unit shipments of hard-disk drives (HDDs) to rise 1% in 2012, we project a 15% increase in the average selling prices due to supply constraints," it said.

Prime examples of the interest in cloud computing are Rackspace ( RAX), which has gained 44% in the past three months, and Salesforce.com ( CRM), which is up 47% this year, although it just reported mixed results in its second quarter.

Salesforce now has its own social-networking feature called Chatter, which links customers to deliver services and other functions from the cloud.

Here are eight large-cap technology stocks presented in inverse order of their year-to-date share price gains:

8. CGI Group ( GIB)

Company profile: CGI Group, with a market value of $6 billion, provides a range of IT and business-process services to clients worldwide.

Investor takeaway: Its shares are up 42% this year and have a three-year, average annual return of 37%. Analysts give its shares three "buy" ratings, 10 "buy/holds," six "holds," and one "weak hold," according to a survey of analysts by S&P. Analysts' consensus estimate is for earnings of $1.60 per share this year, and rising 44% to $2.31per share next year.

7. Red Hat ( RHT)

Company profile: Red Hat, with a market value of $ 11 billion, is a provider of Linux operating systems and related middleware and virtualization software.

Investor takeaway: Its shares are up 43% this year and have a three-year, average annual return of 36%. Analysts give its shares 11 "buy" ratings, eight "buy/holds," nine "holds," and one "weak hold," according to a survey of analysts by S&P. Analysts' consensus estimate is for earnings of $1.19 per share this year and growth of 20% to $1.43 per share next year.

6. Salesforce.com ( CRM)

Company profile: Salesforce.com, with a market value of $21 billion, is a leading provider of on-demand customer-relationship-management applications via the Internet or cloud computing. Its Software as a Service, or SaaS, provides a range of specialized services from its data centers.

Investor takeaway: Its shares are up 47% this year and have a three-year, average annual return of 41 %. Analysts are all over the place with their ratings, giving its shares 20 "buy" ratings, 14 "buy/holds," three "holds," one "weak hold," and four "sells," according to a survey of analysts by S&P. Its shares have a current forward P/E of 88.6. S&P recently raised its 12-month target price to $150 from $140, or just below its current share price of $149.74.

5. Rackspace ( RAX)

Company profile: Rackspace, with a market value of $8 billion, is a provider of cloud computing services, managing Web-based IT systems for small and medium-sized businesses, and large enterprises worldwide.

Investor takeaway: Its shares are up 50% this year and have a three-year, average annual return of 68%. Analysts give its shares six "buy" ratings, four "buy/holds," 10 "holds," and one "weak hold," according to a survey of analysts by S&P. It has a forward P/E of a lofty 52.7.

4. Catamaran ( CTRX)

Company profile: Catamaran, based in Canada and with a market value of $9 billion, provides pharmacy-benefit-management services and information-technology services to the health-care industry.

Investor takeaway: Its shares are up 63% this year and have a three-year, average annual return of 64%. Analysts give its shares 10 "buy" ratings, nine "buy/holds," and six "holds," according to a survey of analysts by S&P. Its shares have a forward P/E of 25.7.

3. Teradata ( TDC)

Company profile: Teradata, with a market value of $13 billion, is a leader in the data-warehousing industry. Its customers are typically Fortune 500 companies.

Investor takeaway: Its shares are up 65% this year and have a three-year, average annual return of 45%. Analysts give its shares six "buy" ratings, seven "buy/holds," and seven "holds," according to a survey of analysts by S&P. S&P has it rated "hold," on valuation concerns.

2. LinkedIn ( LNKD)

Company profile: LinkedIn, with a market value of $12 billion, operates a professional social-networking site on the Internet with more than 100 million members in over 200 countries.

Investor takeaway: Its shares are up 89% this year and have a one-year return of 39%. Analysts give its shares six "buy" ratings, eight "buy/holds," nine "holds," and one "weak hold," according to a survey of analysts by S&P.

Morningstar analyst Rick Summer says that "with an attractive business model and a user base that may never leave, this wide-moat firm is one of the few social Internet companies to truly hold a defensible position," but he adds that "the stock price is overly optimistic and does not offer an attractive risk/return profile for investors at this time."

1. Seagate Technology ( STX)

Company profile: Seagate, with a market value of $12 billion, designs and manufactures hard-disk drives for consumer and enterprise computing.

Investor takeaway: Its shares are up 92% this year and have a three-year, average annual return of 33%. They carry a dividend yield of 4.18%. Analysts give its shares five "buy" ratings, one "buy/holds," 14 "holds," one "weak hold," and two "sells," according to a survey of analysts by S&P.

S&P lowered its rating to "hold" from "buy" on Aug. 23, saying it expects that "PC sales will be weak due to a slowing global economy. We also think sales of hard-disk drives will be hurt by the emergence of tablet computers."
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.