Computer networks: Plug into profits

December 24, 2015 01:00 PM

The Zacks Industry Rank divides companies into one of 265 industries. That is a very granular approach to find very specific industry niches with the most upside potential. 

One potential downside of this model is that industries with only a handful or less of members can be artificially labeled with too high or too low of a rating. That is why the rank for industries with more than five stocks is more robust. Using that approach, we find that computer networks is the highest rated industry because seven of its 14 members currently have buy ratings (note the average across all industries is to only have 20% of stocks as buy rated).

This high ranking should not be a surprise to anyone who monitored the Q3 earnings season. Clearly technology was the area of strength with Alphabet, formerly Google (GOOGL), Amazon (AMZN) and Apple (AAPL) leading the way. Many of the companies in the networking group are benefiting directly from the increase in technology spending from these industry giants. 

Here are the top three stocks in the group that you should focus on at this time.

Brocade (BRCD): Their strengths are in IP Networking products and Storage Area Networking (SAN). The past three quarters they have averaged a 20% earnings surprise. This has earnings estimates for the future on the rise, which is why it’s a Zacks #1 Rank Strong Buy. However, it also sports a Value Score of A. That is rare these days as few technology stocks are truly a bargain. Here you get growth, value and 1.7% dividend yield to boot.

Netgear (NTGR): They are well known for their home Wi-Fi products. Yet, as it turns out, much of the recent growth has been on the business side with some high-end networking products. This is leading to ample sales and margin growth bolstering the bottom line. This is a bit more of a turnaround story where they have recently brushed off a couple weak quarters with an impressive 26% earnings beat that has earnings estimates flying higher. Plus all three Zacks style scores are favorable: Growth Score A, Value Score B, Momentum Score A.

QLogic (QLGC): This is a play in the storage and server network infrastructure space. They have enjoyed steady growth the past few years, but this last quarter they put everyone on notice that something special may be taking place. This came in the form of a 78% earnings beat in the past quarter. If that earnings momentum continues, then these shares offer great upside potential. 

Most investors like having an allocation to technology stocks given the growth potential. However, it is the growth “reality” that is necessary for the stocks to go up in price. These three stocks have a lot of good realities taking place now and you should certainly consider adding one or more of them to your portfolio at this time.

About the Author

Steve Reitmeister is the executive vice president at Zacks Investment Research at zacks.com. The cornerstone of the firm is the Zacks Rank stock rating system and its 26% average annual return since 1988. These results have been examined and attested to by the independent accounting firm Baker Tilley. @ZacksResearch