2 Tech Greats I'm Looking to Buy on the Dip
Looking to buy the dip? Here are two stocks in high-growth tech companies that I'm looking to pick up from the bargain bin. Before getting into which stocks, though, let's get into why I like them.
Where the growth is
Once upon a time, tech companies were growth companies. Nowadays, tech is a cyclical growth sector -- and, in some cases, just a cyclical sector -- subject to the whims of the economy. That said, within tech there are still growth areas. Thus, no matter what the economic and stock market outlook, these three themes look like good bets for tech investors:
- The cloud.
- Emerging markets outgrowing developed markets.
- Business analytics / big data.
Let's make a deal ... not
In a weak economy, I want to own stocks in companies that don't need to deeply discount prices to generate sales. In a strong economy, inflation could drive up a company's costs, so I want a company with enough pricing power to protect margins.
What gives a company pricing power?
- A unique -- or at least superior -- product or service that meets customer needs.
- Saving customers money.
- Helping boost a customer's revenue or otherwise making the customer's business more competitive.
- Becoming a status symbol, particularly with consumers.
Growth at a reasonable price
For investors who don't have the stomach for rich P/E ratios or contrarian plays, these two well-known tech companies trade at attractive P/E ratios and should deliver double-digit EPS growth over the next few years even if the economy slows.
Apple's (NAS: AAPL) incredibly successful iPad is a key driver of the "PC is dead" thesis. Its iPhone has helped it build a massive cash stash and become one of the most valuable companies in the world as measured by market cap. Over the past 12 months its revenue grew 76% year over year, a stunning accomplishment for a company with $100 billion in revenue. EPS grew an even more impressive 90%.
Expanding distribution to more geographies and telecom carriers is expected to keep Apple's growth going strong. To be sure, at some point the law of large numbers should slow that growth. I'm already seeing early warning signs that the company is having trouble keeping up, but I suspect it will be two or three years before that becomes an issue for the stock. In my view, the near-term risk for Apple shareholders is the health of founder, CEO, and chief innovator Steve Jobs, who has been on medical leave since January. With the stock at a P/E ratio of 14, much of that risk appears to be priced in.
IBM (NYS: IBM) has an uncanny ability to grow earnings no matter what the economy, despite lackluster revenue growth. The company exits businesses as they become commoditized. For example, it sold its PC business in 2005. This well-managed company is currently benefiting from early investments in emerging markets, cloud computing, business analytics, and smarter planet initiatives. Over the past five years, its dividend has more than tripled, growing at an average annualized rate of 27%. That's cash you can live on even if inflation heats up.
From 2005 through 2010, EPS grew at an average annualized rate of 19% ... with unusually high quality of earnings. Management has a well-thought-out plan to grow EPS by at least 11% annualized through 2015 -- and a history of beating its plans. That should support continued strong dividend growth.
A sum-of-the-parts analysis I did in late July valued the company's different businesses by applying P/E ratios from competitors including Accenture (NYS: ACN) , Check Point Software Technologies (NAS: CHKP) , Dell (NAS: DELL) , Hewlett-Packard (NYS: HPQ) , and Oracle (NAS: ORCL) to IBM's profit mix. The analysis concluded that the stock's fair value was 35% above the stock price. As of Tuesday's close, the stock traded at a reasonable 13.7 P/E ratio and yielded 1.8%.
The following tables show Apple and IBM stack up versus two high-growth tech stocks -- VMware and ARM Holdings -- and two tech valuation plays -- Intel and Microsoft -- that I'm also looking to scoop up from the bargain bin. Note that both Apple and IBM grew EPS during the Great Recession.
Revenue Growth, 2009
EPS Growth, 2009
Revenue Growth, Past 12 Months
EPS Growth, Past 12 Months
Sources: Capital IQ (a division of Standard & Poor's), CNBC.
Forward P/E Ratio*
Consecutive Quarters of Beating Estimates
|Apple||14.0||11.4||0.0%||$374.01||At least 15|
|IBM||13.7||12.2||1.8%||$170.61||At least 14|
Sources: Capital IQ (a division of Standard & Poor's), CNBC.
*P/E ratios, dividend yields, and price are as of the market close on Aug. 9, 2011.
Trying to predict the direction of the economy or stock market may be Fool's folly. Apple and IBM appear poised to outperform the market no matter what the future holds.
What do you think: Will these tech stocks outperform the market? To help you stay abreast of their prospects, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding these companies to your Watchlist now:
- Add Apple to My Watchlist.
- Add IBM to My Watchlist.
- Add Accenture to My Watchlist.
- Add Check Point Software to My Watchlist.
- Add Dell to My Watchlist.
- Add HP to My Watchlist.
- Add Oracle to My Watchlist.
At the time this article was published Fool contributorCindy Johnsonowns shares of Microsoft.The Motley Fool owns shares of Oracle, IBM, Intel, Apple, and Microsoft and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Accenture, VMware, Intel, Apple, Check Point Software Technologies, and Microsoft, creating bull call spread positions in Apple and Microsoft, and creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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