By Jacob Sonenshine

Technology stocks are near a historic high over the past few years, so it makes sense to try to stay away from them. Fortunately, there's a handful of non-tech names that have the potential for strong gains.

The S&P 500 Information Technology Sector Index rose to a record high in mid-August. The market believes in tech's long-term earnings growth, as semiconductor makers such as Nvidia see growing demand for artificial-intelligence chips, and software providers such as Microsoft see rising demand for AI offerings.

Now tech stocks are valued at just over 27 times aggregate earnings that analysts forecast for the coming twelve months. That's at the high end of its range since early 2022, a level that that tends to discourage more investors from buying in the sector, thus preventing tech stocks from rising much further.

So buying tech stocks right now isn't the best idea, which is why Citi strategists conducted a screen for stocks that have the potential for price gains; most of the companies in the resulting list are not technically in the S&P 500 tech sector. These stocks, found in the strategist's Citi Thematic 30 Recommended List index, are trackable on the Bloomberg terminal. The Citi strategists updated the index, which now includes names in healthcare, industrials, financials, and consumer.

The criteria for inclusion in the index start with a "theme," or something the company is doing to participate in a new economic trend that helps it grow earnings. Some examples of themes are selling goods through digital, or "contactless," means, employing financial technology such as digital payments, developing new medical equipment, and manufacturing new-and-improved industrial equipment. Many of the qualifying companies have analyst estimates that call for earnings growth near or above the S&P 500's expected aggregate earnings growth of 10% this year, according to FactSet.

The next criterion is that a stock doesn't appear exorbitantly expensive. Sure, many of the names on Citi's index trade at multiples below tech, but Citi includes only those that trade near a 2 times "PEG" ratio. That's the price/earnings-to-growth ratio, which is calculated by dividing the forward P/E multiple by expected earnings growth.

A lower PEG ratio means an investor can enjoy more earnings growth for every P/E multiple point he or she pays. That means the growth potential may not be fully reflected in the valuation, so continued growth can push the stock price higher. The tech sector has hovered at around a 2 times PEG ratio over the past few years. Any stock around two-times PEG or lower looks not so pricey.

Another key criterion is overall quality. Citi wants only those companies whose return on equity and profit margins are at par with those of the S&P 500. The companies that are now expected to see ROE and margins above their own long-term averages are in fintech and medical-device manufacturing. These quality metrics show that these companies have operated efficiently, speaking to solid execution, which often provides comfort to the market that these companies will meet growth expectations -- and pump their stocks higher.

Here are a few names in the index: Uber Technologies, DoorDash, Pinterest, Equifax, Capital One, Flowserve (a manufacturer of environmentally-friendly industrial pumps), and medical-device makers Medtronic and Boston Scientific.

Boston Scientific offers a good example of a company that meets Citi's screen criteria. It sells surgical products to hospitals, with a focus on heart-related products. The number of heart-health cases grows every year, and Boston has made dozens of acquisitions to bolster its suite of offerings, two factors that have helped make the company one of those most relied-on providers of medical tools.

Analysts expect 11% annual sales growth over the next two years, to $24.3 billion by 2027, according to FactSet. Boston already has high profit margins, and analysts expect management to continue to increase investments in its operations. But the company also wants to keep its debt burden limited, reducing interest expenses. Also, management said on its second-quarter earnings call that it wants to use cash flow to repurchase shares, so analysts expect earnings per share to grow 14% annually over the coming two years.

That growth can push the stock higher because its 31 times expected 2026 earnings -- which the market is starting to focus on -- isn't so high. It leaves a PEG ratio of only a hair above 2 times. That's close to the broader market's level, but it's also well below Boston's own peak of 3 times in the last few years. As long as the company continues to grow earnings aggressively, the stock can continue to gain.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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August 25, 2025 14:26 ET (18:26 GMT)

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