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These 3 Tech Stocks Will Outperform Index Funds | The Motley Fool

It’s a smart strategy for new investors to focus their initial investments on index funds, which mirror the performance of major indexes like the S&P 500, rather than buying individual stocks. The logic is simple: When someone is looking for market performance, most actively managed funds (which usually focus on specific stocks) can’t consistently beat a major index, so it makes more sense to simply buy a piece of the entire index.

Index funds are passively managed, so they charge much lower fees than actively managed mutual funds or hedge funds. They’re also automatically diversified, so investors aren’t putting all their eggs in a single basket. However, investors who do a little more homework will realize that plenty of stocks regularly outperform the S&P 500. The tech sector, which is currently reeling from a fear-driven rotation from growth stocks to value stocks, is fertile ground at the moment for these market-beating investment plays.

It’s still too early to chase the frothier tech stocks, since the selling could continue as long as bond yields keep rising. But I believe three less-exciting tech stocks will easily outperform the S&P 500 this year.

Image source: Getty Images.

All three stocks regularly beat the S&P 500

The S&P 500 nearly doubled over the past five years. However, investors would have made more money by simply investing in Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), and Micron Technology (NASDAQ:MU) during the same period.

^SPX Chart

Source: YCharts

Past performance doesn’t guarantee future gains, but all three tech giants are expected to generate double-digit sales and earnings growth this year. The projected earnings growth rates for all three companies are also lower than their forward P/E ratios — which indicates their stocks are still reasonably valued.

Company

Estimated Revenue Growth (Current Year)

Estimated EPS Growth (Current Year)

Forward
P/E Ratio

Microsoft

15%

29%

28

Apple

22%

36%

25

Micron

23%

66%

10

Data source: Yahoo Finance, March 9, 2021.

All three companies have near-term catalysts

Wall Street has high expectations for all three companies, because they all have visible catalysts on the horizon.

Microsoft, which ends its current fiscal year in June, weathered the pandemic by offsetting its slower sales of enterprise software with the growth of its gaming and cloud businesses.

The Xbox Series S and Series X consoles.

Image source: Microsoft.

The launches of its new Xbox consoles last November, the continued expansion of its cloud businesses, and the post-pandemic recovery of its enterprise software business are all expected to drive its growth throughout the end of fiscal 2021 and 2022.

Apple is expected to ship a record number of iPhone 12 handsets this fiscal year, which ends in September. Its first family of 5G phones should convince many users to finally upgrade their older devices, and that expanding hardware base will support the future growth of its services ecosystem, which surpassed 600 million paid subscribers last quarter.

Micron, which also ends its fiscal year in September, is one of the world’s largest producers of DRAM and NAND memory chips. It struggled with price declines for both types of memory throughout 2019 and the first half of 2020, but it passed a cyclical trough in the second half of the year.

Micron expects higher sales of PCs, the accelerated production of new 5G phones and new gaming consoles, and robust demand from the data center market to all drive its revenue and earnings growth over the next few years.

It could be a great year for defensive tech stocks

The recent sell-off across the tech sector didn’t affect Microsoft, Apple, or Micron as much as higher-growth tech stocks that were trading at much higher valuations. That rotation, which could continue for the foreseeable future, might convince more investors to buy shares of these tech stalwarts — which will likely leave the S&P 500 and its associated index funds in the dust.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


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