The next round of quarterly earnings reports will start hitting the street next week, and right on cue the heat and humidity spiked up along with the overall stock market. The pressure is on for a lot of tech companies to deliver better than expected news so it will be interesting to see who comes through and who doesn’t.

Of course, we don’t make recommendations based on very short term metrics so we continue to abide by the BiQ and STR as our guide to identifying companies that are likely to outperform the overall market in the months to come. For the first half of this year our Investments Portfolio, which is selected solely on the basis of the STR, was up an average of 10.12% compared to 6.40% for the tech-heavy Nasdaq Composite Index.

But here is what I find so fascinating: those same ten stocks that we picked at the beginning of the year STILL score the highest of the 50 tech stock we cover according to our methodology, despite the fact they have outperformed the overall market by 58% during the first half of this year! [To see for yourself, go to our Smart Tech 50 Portfolio and double-click on the STR column to see how these companies rank according to our Smart Tech Rating]

If you click on that same column again it will rank them from lowest to highest, revealing that Netflix (NSDQ: NFLX) is now the most overvalued tech stock according to our system (tied with Twitter at 0.3, and just a notch below YELP at 0.4).  If you are looking for which companies are most likely to come out with disappointing earnings reports some time later this year, this is a good place to start.

So what does this mean? It means that most tech stocks are still grossly misunderstood, with too much stock controlled by short-sighted investors. In other words, the tech sector continues to sift out the long term winners from the losers via a process of “earnings rotation” that slowly reveals the true innogrators from their less enlightened rivals that spend too much money on less productive activities.

How soon until Facebook (NSDQ: FB) finally pays the price for throwing money at anything that might have something to do with its vaguely defined goal of bringing the internet to the world? We don’t know, but we think that day is coming soon. Just look at Salesforce.com (NYSE: CRM) as an example of fantasy slowly giving way to reality. It peaked above $66 less than five months ago, and now trades below $55.

We think that is a pattern that will repeat itself for many other tech companies that cannot deliver earnings growth in the months to come. Don’t be surprised if the same ten stocks we picked at the beginning of this year perform just as well during the second half, as the scheduled demise of Quantitative Easing in October will turn up the heat even more on companies that have made poor choices and are now frantically trying to catch up.

NASDAQ Composite Index:                                                                        

Friday, July 11= 4,415.49                                                         

Year to Date = + 6.6%                                          

Trailing 7 Days = – 1.7%

Trailing 4 Weeks = + 1.1%

Portfolio Update

Good news for Investments Portfolio holdings Western Digital (NSDQ: WDC) and Seagate Technology (NSDQ: STX) last week. First, research firm Garner issued a report indicating the global PC sales ticked up slightly in the second quarter of this year, the first time that has happened since 2012. Then, an analyst at Evercore Partners raised his earnings estimates for WDC and STX as a result, which attracted a lot of attention to both stocks.

Seagate reports earning later this week on the 17^th while Western Digital reports on the 30^th, so we could see some accumulation in both companies’ shares leading up to those announcements. Already STX has seen a 4% upswing in its value during the past few days, topping out above $60 today after trading below $58 last Thursday. Western Digital has also popped up by a similar amount, trading today above $99 when it sold for less than $94 four days ago.

Another winner from this report is Equity Trades holding Lenovo Group (LNVGY), which had the largest global market share of any PC manufacturer at 19.2%. Our thesis in recommending LNVGY earlier this year is that the PC hardware ecosystem would continue to grow in Asia and Lenovo would benefit from increased demand for servers.  It looks like that scenario is playing out, as since bottoming out near $20 in late February the stock is up more than 40%!

By the way, you may have noticed in our chart above that of our ten portfolio stocks, one of them – CA Technologies (NSDQ: CA) – has a negative return thus far this year. The company reports earnings next week on the 23^rd, and we have no reason to believe that they will be particularly good. However, we note that the company recently divested itself of its storage-software unit so that it can focus on its core business of IT management software. That suggests to us that its management now has a clear innogration strategy in place, in which case recent price weakness in the stock would represent a good buying opportunity.