Technology is becoming increasingly unstable. These three unsexy names could break out.

Many had hoped that a strong economic backdrop would lead to strong first-quarter results for companies, adding fuel to the rally. That wasn't really the case. Earnings season began with a financial slump, adding to the pressure on Big Tech companies' performance.This week Facebook's pro-meta-his platform will appear
,

microsoft
,

and Google's parent company Alphabet's report results.

Of course, technology companies have been doing much of the heavy lifting in terms of market returns since 2023, and for good reason. This is because corporate sales and profits are skyrocketing. Analysts expect first-quarter earnings per share for the Magnificent Seven companies, excluding Tesla, to rise 5.5%.
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In contrast, consensus estimates for the S&P 500 have declined in recent months.

Investors can put more money into technology, but such groups are not unknown. That's not a sure thing either, as most of the Magnificent Seven have collapsed in the past week. Another of his strategies is to look for companies with strong sales growth outside of their sector.

Through the end of last week, only 58% of companies beat analysts' earnings estimates, a much lower percentage than in the most recent one-, five-, and 10-year periods. And the company as a whole beat consensus estimates by about 1%, again lagging its historical average.

That may explain why recent results haven't done much to lift the market.

“Early first-quarter financial reports show that large U.S. companies are significantly beating revenue expectations, not because of revenue growth, but because of cost control,” said Nicholas Colas, co-founder of Datatrek Research. writes. “Investors want earnings to be outweighed by unexpected earnings upside, not tightening.”

This preference is easy to understand. This is because there are limits to how much a company can control costs, and cost reductions can have a negative impact on competitiveness.

One way to find winners is to find companies that are expected to have strong earnings growth and are likely to be more favored by investors.

Barons Companies that are expected to increase their first quarter sales by 30% or more compared to the same period last year will be reviewed. Unsurprisingly, the list was dominated by technology names: Nvidia
,

super microcomputer
,

micron technology
,

corbo
,

and Broadcom were both near the top of the list.

However, companies whose multiples were below the average over the past five years also made it into the rankings.

That list includes:

extra space storage
.

The real estate investment trust's first-quarter revenue is expected to rise nearly 58% to nearly $793 million. Still, future funds from operations (an important indicator for REITs that measure a company's cash flow) is 16.3 times, compared to an average of 20.9 times over the past five years.

Water technology company Xylem will also participate. Even though sales are expected to increase by about 38%, the forward P/E ratio is 29.8x, lower than the average of 31.4x.

first solar

is the cheapest on the list. The solar company's forward price-to-earnings ratio is just 11.1, compared to nearly 29 times over the past five years. Analysts expect sales to increase 31%.

Of course, these companies are not guaranteed to win. For example, solar power companies are in dire straits as fewer consumers are willing to finance solar panel installations due to high interest rates. Additionally, analysts' high revenue growth expectations may be missed, and investor focus may change as the reporting season matures.

At this point, Colas points out, “it's too early to say that profit growth from cost reductions will be the story of first-quarter financial results.”

Nevertheless, for investors looking for interesting ideas outside of technology, companies that aren't just cutting costs for growth are one way to identify potential winners.

Write destination Teresa Rivas teresa.rivas@barrons.com