3 tech stocks with staying power
While some big-name players in IT and gadgets have underperformed in recent months, not all of them are in trouble.
By Jeff Reeves
Tech stocks have had their issues lately, no doubt about it.
The 900-pound gorilla of gadgets, Apple (AAPL), has declined 35% from its October peak. Once-dominant PC maker Hewlett-Packard (HPQ) has plummeted 40% in the past 12 months. And just last week, poor earnings caused a massive 20% selloff in just a few days at cloud computing and IT giant VMware (VMW).
As a result, the tech sector has lagged significantly in recent months. While the S&P 500 is up about 7% since the beginning of November, tech-focused ETFs like the iShares Dow Jones US Technology ETF (IYW) and the Vanguard Information Technology ETF (VGT) are up roughly 3% in the same period.
These are sober signs for many tech investors. But while there are big-picture issues reshaping the tech sector -- the post-PC evolution of technology, lackluster demand driven by an enterprise upgrade cycle that remains weak, and so on -- a number of individual tech stocks still are performing remarkably well.
That's because they have compelling products, sustainable growth plans or rock-solid stability that make them attractive to investors.
Here are my three favorite tech stocks with staying power:
Despite the overtures about a PC decline, Intel (INTC) isn't going anywhere and remains a great pick in my mind. So great that I own the stock, with a cost basis of $21. I think this remains a good entry point for any long-term investors. Here’s why:
- Intel is the largest semiconductor manufacturer on the planet, and its 15.9% market share in 2011 was bigger than No. 2 Samsung (SSNLF) and No. 3 Texas Instruments (TXN) combined.
- Intel has a yield north of 4.2% with a sustainable dividend payout of 46% of fiscal 2013 earnings and a projected 41% of fiscal 2014 earnings.
- Intel hasn't yet figured out mobile, but Apple is rumored to be considering Intel to make chips for its iPads (see phonearena.com) and is about to showcase a new line of chips for Google (GOOG) Android-powered devices in a few weeks, according to Techcrunch.
- Based on a share price of $21 and FY2014 earnings of $2.17, you could get a rock-bottom P/E of 9.1 when you buy.
Sure, PC troubles remain a drag and INTC stock is off 20% in roughly a year. But Intel is more efficient and has stabilized. The big risk is that Intel just committed a $13 billion capex plan to expand capacity, which some say should lead to oversupply, but I think is the right move in anticipation of stronger business and consumer demand in the next few years as it gets more into mobile and as enterprise spending bounces back.
Many of those who have punched out of Apple stock amid the recent malaise have found some comfort in mobile giant and AAPL partner Qualcomm (QCOM).
This is a wise trade because it not only allows you to share in a bit of Apple's success since QCOM is a supplier for iPhones and iPad chips, but also because it allows you to get involved with mobile beyond Apple's brand. In addition to key Apple contracts for the iPhone 5, Qualcomm's innovative new Snapdragon chips are a crucial component in a host of Android OS phones and tablets. It's even in the new BlackBerry (BBRY) line of devices, including the Z10.
The positioning as a dominant mobile player is only the beginning, too.
- QCOM has a bulletproof balance sheet with over $12 billion in cash as of its last earnings report, $6 billion in operating cash flow and zero debt.
- Qualcomm stock also is reasonably valued with a P/E of about 14 on FY2014 earnings.
- It has a five-year growth rate well north of 20%, with earnings set to jump 28% from FY2012 through the current FY2013 -- with double-digit growth projected again in FY2014.
- Even the technicals look good (see InvestorPlace)!
As Paul R. La Monica wrote on InvestorPlace when he picked Qualcomm as the best stock to buy and hold for all of 2013, "Qualcomm looks like it is poised to benefit from the one thing that is certain in 2013: People are going to buy more smartphones and tablets. So why make bets on who’s going to steal more market share when you can own a profitable, growing, dividend-paying component maker with ties to nearly all of the major hardware players?"
IBM (IBM) has doubled from its bear market lows, but lately, Big Blue has been pretty sleepy. The stock is up about 5% in the last 12 months to return less than half of the S&P 500, and it now pays a meager yield of less than 1.7% after this run-up.
Still, there are signs of long-term potential at this tech stock -- particularly given its strong performance this earnings season.
IBM has a five-year growth rate in double digits, and while revenue is set to grow only a few percentage points in fiscal 2013, earnings should be up over 16%, according to forecasts.
What's more, IBM is showing that it is capable of beating these forecasts handily. Shares popped 5% a few weeks ago after both profits and sales topped expectations for its fourth-quarter earnings.
Its software and services business remain strong cyclical plays for a recovery in business spending, but its footprint in other areas including cloud computing, Big Data and healthcare services allow it to find stability and growth even if businesses aren’t willing to spend big on servers and the like.
IBM stock has a P/E just north of 12 based on FY2013 numbers, and closer to 11 based on FY2014 earnings forecasts.
When you couple the reach and power of existing IBM businesses along with its big potential in growing segments of the market thanks to the supercomputer Watson and other innovations, there's good reason to like the long-term prospects of this tech giant.
Furthermore, the dividend has increased 70% since the recession but remains less than 20% of earnings. So while payouts aren’t great now, the strong cash flow and growth prospects indicate that continued dividend increases are in the cards over the next few years.
- Marc Bastow also likes IBM and Intel for the long haul, and adds Microsoft (MSFT) and Cisco (CSCO) to his list of buy-and-hold tech plays. (InvestorPlace) (Microsoft owns and publishes Top Stocks, an MSN Money site.)
- MarketWatch has a great rundown of dominant tech stocks and how they stack up right now. (MarketWatch)
- Richard Saintvilus offers 3 Big Data tech stocks to buy. (Forbes)
- Chris Hill, Tim Hanson and Bryan Hinmon break down two tech stocks moving in very opposite directions -- Amazon (AMZN) and BlackBerry (formerly known as RIM). (The Motley Fool)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in both Intel and Apple.
More from InvestorPlace
Copyright © 2014 Microsoft. All rights reserved.
Tighter regulations and the end of a lengthy bull market in bonds have changed the landscape forever.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.