3 Tech Stocks to Buy for 2013


I run a real-money portfolio on Fool.com that focuses on tech investing. As of the close of 2012, the portfolio was running even with the market, both returning about 22.8% since the portfolio's creation. However, a big problem has been the amount of cash I have sitting around. Currently, more than 50% of the portfolio is in cash, which is troubling since cash loses to a market return of 22.8% by ... 22.8%. Take away the high levels of cash I've held, and the stocks I'd purchased would be trouncing the market.

Cash can be a real drag on returns in rising markets. It's easy to look at your returns in a brokerage account, but if you want a full picture of whether your net worth is keeping up with the market, you must consider cash lying around as earning either zero returns, or close to it. That's why I'm going to be placing more money behind two proven outperformers in the portfolio, and another company set to ride the next major trend.

Adding to Apple ...
Not surprisingly, Apple's among my largest holdings. After my initial purchase of Apple back in early 2011, its shares have risen 57% while the Nasdaq saw a respectable 16% rise during the same time frame. That's a performance level any investor should be very satisfied with.

However, the recent pullback has also created opportunity in Apple's shares. At the heart of the matter is that Apple's growth rate is slowing. Mere weeks away from the company's holiday earnings on Jan. 23, Wall Street is predicting a 4% year-over-year earnings decline. Just 90 days ago, the Street was sitting on a prediction of 11% earnings growth.

The culprit behind Apple's sagging earnings expectations isn't necessarily sales; the company is still expected to post 18% sales growth when it next reports. Instead, shrinking margins are squeezing out profitability. In turn, the focus on Apple's diminished profitability has led to longer-term fretting about diminishing future growth opportunities, especially in smartphones.

There is some validity behind these concerns. Developed-market smartphone growth is slowing. AT&T just announced that it activated 10 million smartphones last quarter. That's a nice, big, round number, but it also means as little as 6% year-over-year growth. Simply put, the eye-popping smartphone growth rates have moved to emerging markets.

Yet other concerns are less valid. Let's take margins. Yes, Apple may show gross margins below 40% this quarter. However, it's also dealing with an unprecedented refresh cycle of products. As CFO Peter Oppenheimer noted on Apple's last earnings call, 80% of revenue in the December quarter will come from products that were new or repriced in a six-week window before late October. That quote leaves wiggle room as to exactly which products he's referring to, but the point is that new products have lower margins that expand throughout their life. With the iPhone and iPad Mini both having challenging ramps, lowered margins in the December quarter should be noted but stand out more as a product life-cycle bump than a major red flag.

Overall, the iPhone still has the highest brand loyalty among smartphone brands. Its growth may lag emerging-market-driven smartphone demand in 2013, but Apple no longer needs 25% iPhone growth each year for its valuation to make sense. Throw in the iPad Mini as a major step toward maintaining Apple's tablet market share lead as that market continues booming, along with a distinct lack of enthusiasm for future product launches and I'm very happy to be paying 12 times earnings for Apple today.

I'll be adding roughly another $1,600 in Apple share to my portfolio tomorrow. That will bring Apple up to 16% of my portfolio, which is quite hefty. However, when you consider that Apple is actually 20% of the S&P 500 information technology index, and I'm focusing solely on tech stocks, that level of Apple is pretty reasonable.

More Cirrus Logic, too ...
I won't spend as long discussing my second buy, in part because it's an Apple derivative play. I'll be picking up a bit more Cirrus Logic .

The company definitely comes with its risks, as a whopping 79% of its revenues came from Apple last quarter, but it's also been expanding its role in Apple's products.

Simply put, it's a company that's sold off quite a bit recently, and the sell-off has been baffling to me. In the December quarter, Cirrus guided to sales that would be up about 145% year over year on the high end of its guidance. The reason is simple, Cirrus Logic made major gains in the amount -- and value -- of its chips going into the new iPhone 5. Those eye-popping rates will come back to Earth later next year, but by the time they do, the company will be trading at single-digit earnings multiples.

Why's Cirrus selling off in spite of such great news with Apple? Well, the company guided to margins that could be decreasing 2 to 3 percentage points concurrent with its massive rise in revenues. This seems like an overblown concern to me. I'll quote Cirrus Logic CEO Jason Rhode on his reaction to the situation:

"Achieving approximately double the revenue with only a few points of margin erosion is a trade-off most semiconductor companies would happily make in light of the huge growth in operating profit that this drives."

That about sums up my reaction as well. In any case, I'll be adding 20 more shares of Cirrus to my portfolio tomorrow. That's a smaller buy than Apple, but it's also a smaller and riskier company.

... And Corning
Finally, we get to a new buy for the portfolio: Corning. The company has a litany of business lines, but my thesis centers on one: the glass it creates for televisions.

I've been interested in Corning for quite awhile, namely because of its cheap P/E and generous -- and rising -- dividend yield. However, I've avoided taking the plunge and buying shares because shifting consumer spending wasn't working in the company's favor.

That is, while Corning boasts Gorilla Glass used across mobile devices, gains in its Gorilla Glass are more than offset by sagging television sales. The connection between mobile devices and lackluster TV sales might seem tenuous, but consider that the average selling price of an iPad was about $536 last quarter. Televisions between 50 and 54 inches had an average selling price of $520, according to the NPD group. The 10-inch tablet actually costs more! Consumers are trading off smaller devices with better functionality for larger televisions. Simply put, there's little reason to upgrade TVs if you already own one.

That's a huge problem for Corning, because its revenue is in line with more display content in a device. It takes a lot of smartphones to equal one big-screen LCD television.

However, I deeply believe that television is approaching an inflection point where it'll receive a foundational change.

Did you own a smartphone in 2006? The answer is likely "no." And now you probably do have one, while 700 million will be sold around the world this year, and you just as likely can't live without it. Yet back in 2006 you had no idea how bad you wanted one. That's because the future had yet to be invented.

Welcome to televisions in 2013, a dismal, languishing field ready for a complete overhaul, a revolution in functionality. I explained in a previous article how I think this trend can be brought about, but the short explanation is that mobile operating systems like Android or iOS appear ready to scale into the living room. The television is a horribly un-user-friendly device, like smartphones in 2006 -- but like smartphones, it doesn't need to be that way.

In turn, that creates a powerful reason for consumers to once again buy television. Right now, market forecasters are predicting little to no growth ahead for televisions in 2013.

However, these predictions are based on what the TV is today. Most smart-TV users don't even know how to use a majority of features.

Simply put, an event like the introduction of an Apple TV will spur other major TV manufacturers to catch up. The end result is TV sales beyond expectations in coming years.That's a general trend that presents no shortage of upside for Corning.

Is this thesis a slam dunk? Of course not. Nothing is in investing. Better televisions could either not be forthcoming, or fail to bring about the refresh cycle I believe is in waiting to be unlocked. In addition, television display technologies is rather fluid, and there are fear that future technologies like RGB OLED could be harmful to Corning's dominance.

However, with a P/E sitting around 10, Corning has rather limited downside. I'll be willing to patiently wait on the rebirth of connected television across 2013 and will invest $2,000 in Corning tomorrow.

More from Supernova
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The article 3 Tech Stocks to Buy for 2013 originally appeared on Fool.com.

Eric Bleeker, CFA, owns shares of Cirrus Logic. The Motley Fool recommends Apple and Corning and owns shares of Apple, Cirrus Logic, and Corning. 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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