4 techs every investor should know

Each of these potential buys is a stalwart of one corner of the technology world; each offers investors a good bargain now and upside potential over the longer haul.

By The Fiscal Times Nov 16, 2012 12:56PM
Image: Circuit Board © Datacraft Co Ltd, imagenavi, Getty ImagesBy Suzanne McGeeThe Fiscal Times logo

A decade ago, Microsoft (MSFT), Dell (DELL), Cisco (CSCO) and Intel (INTC) were known as the “four horsemen” of the technology world. But as the PC industry has given way to mobile and cloud computing, that quartet no longer dominates the landscape, much less the world of technology stocks. Today’s list of giant, 800-pound technology gorillas --those that have and will continue to shake up the world and dominate the markets -- are more likely to be companies like Google (GOOG) and Amazon (AMZN).

Then there are four technology companies out there that aren’t necessarily the biggest ones in which you could invest, or even ones that you would automatically add to your portfolio.But each of them is a stalwart of one particular corner of the technology universe; each offers investors some upside potential over the longer haul and has a solid argument for representing value at their current price levels.

Together, the first three on this list can provide clues to the health of the tech sector and even the corporate world, in much the same way the “four horsemen” once did. They aren’t “must owns” in the same way that those 1990s generation technology giants were, but they are “should considers” – stocks that, if you don’t stop to at least think through the reason to own or avoid them – you might find yourself kicking yourself in a year or two’s time.

If any tech giant comes closest to playing the same role that the Four Horsemen once did, it’s Apple. This stock seems never to be out of the headlines; most recently it landed there because hedge fund manager David Einhorn lightened up on his Apple holdings, becoming just the latest in a series of investors to do just that and pushing its stock price well below its highs of the year. Apple’s growth rate may be slowing, but not that much – and Apple’s dividend yield has climbed to nearly 2 percent and may rise further if, as expected, Apple continues to boost its payout. More significantly, the company now trades at only about 12 times forward earnings, a remarkable discount given its historic growth. Not surprisingly, S&P Capital IQ just raised its rating on the stock from a buy to a strong buy.

So why is it so cheap? Two reasons, only one of which has to do with the company’s fundamentals – the growing uncertainty about whether Apple can sustain its growth and continue to innovate, not just defensively, in response to new product launches like smartphones from Samsung or tablets from Amazon or Google. True, margins have contracted, but that may have more to due with the fact that whenever Apple launches new products, its initial costs tend to be higher. There’s another reason for investors to be lightening up their holdings of Apple stock right now: Come 2013, no one knows what tax rate they’ll face on capital gains should they decide to pocket some of their profits in the stock, so it’s better to lock in those costs now and buy the shares back later should the company continue to deliver on earnings. (After all, Apple has soared more than 220 percent over the last five years, and is still more than 40 percent higher in the last 12 months.) But none of these are reasons for Apple to start trading at levels suggest that growth has stalled.

In the case of Qualcomm, investors are giving the company the benefit of that kind of doubt. Qualcomm may never reach the giddy heights that Intel once occupied, but regardless of which kind of smartphone, tablet or other device consumers snap up this holiday season, odds are that it will be powered by the high-end chips made by Qualcomm. Not surprisingly, the company’s profits are soaring as a result. Even better, Qualcomm’s forward-looking forecast trounced the outlook offered by most analysts. The word is that supply constraints are easing up, and that will be good news for the company’s revenue going forward. Here’s a stock that already trades at a slight market premium, but that could go higher still: its sales won’t depend on which gizmo emerges as the market favorite.

Another pick in this group is an even more venerable player, and one of the original Four Hoursemen: Cisco, which also recently reported big gains in both earnings and revenues, and also beat forecasts. Cisco has long been providing the work with all the routers and switches that enable us to become Internet addicts and has moved on to establish itself as a player in cloud computing as well. True, the company’s gross margins narrowed very slightly, sales of both switches and routers dipped, and CEO John Chambers warned he doesn’t see any signs of improvement in the European market as likely any time soon. But Cisco is still a company that has shown itself able to deliver healthy gains in both earnings and revenues (a tricky proposition these days), and its stock is trading at an even bigger discount than Apple (at about 11.5 trailing 12 month earnings) and offers a much bigger dividend yield of 3.17 percent. Some investors might be steering clear because they’re worried their dividend income might be taxed at a higher rate next year, but that strikes me as cutting off your nose to spite your face.

And then there is the outlier, Facebook. Yes, I know. The combination the overhyped and messily executed IPO has had an unpleasant lingering impact on the stock, aggravated by the disappointing set of quarterly results released over the summer. When the lockup on the company’s stock (set in place at the time of the IPO) expired this week, the expectation was that a flood of new stock would hit the market, further weighing on Facebook’s share price, still trading 41 percent below its IPO level. But even before it became clear that insiders would choose to hang on to their stock rather than sell at those low prices, Facebook’s shares had been doing well, rising 14 percent in the last month.

Don’t misunderstand: Facebook still faces plenty of headwinds, notably the need to prove that its management team has what it takes to formulate new and profitable strategies for the company as it evolves, and to solve the most immediate challenge: making Facebook a profitable business on smartphones and other mobile devices. Odds are that Wednesday’s pop in the value of Facebook’s stock has more to do with a rush by short-sellers to cover their bearish bets than it does on a wave of sudden conviction on the part of investors that Facebook is the next Apple, poised for dramatic outperformance over the long haul. But whether it’s just a short squeeze driving the share price or a longer-lasting trend, it’s worth remembering that even though that first earnings announcement as a public company was a blow to investors, its second, only a few weeks ago, was a signal that better things could lie ahead.

None of these four technology companies is kicking back and eyeing the landscape complacently; each faces significant strategic challenges. But for investors interested in finding a way to combine growth and value objectives, all of them could be a good place to begin that quest. These are the Four Technology Companies On Which You Shouldn’t Turn Your Back.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

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Dec 4, 2012 7:30PM
Really? Facebook? How about a company that actually has a solid business model?
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