3 Good Tech Stocks for a Bear Market
The last two years have produced remarkable gains, but now we're seeing disappointing earnings guidance, and as the Fed's bond-buying program slows, there are concerns that the market will enter a correction. Plus, a 3% drop in the S&P 500 to start the New Year hasn't occurred in the last two years. However, if the market falls aggressively, Apple , Hewlett-Packard , and Yahoo! might present security and upside.
Too good to stay so low
Currently, Apple is trading with losses of 7.7% after issuing guidance below analyst expectations. Therefore, at $507, some might consider Apple an unlikely candidate to thrive in a down market.
Apple had a great quarter by all measures: It saw total revenue rise 6% to $57.59 billion, while iPhone sales reached $32.5 billion. Furthermore, the company guided for a gross margin of 37%-38% in the upcoming quarter, which would be flat year-over-year, showing that cost concerns might be behind the company.
Aside from strong growth and stable gross margin, Apple is cheap. It trades at just 10 times forward earnings, versus Microsoft at 12.3 times. Plus, Apple is growing faster, and the company has a slew of catalysts including fundamental gains from China Mobile.
With that said, Apple is a cash-rich company with $159 billion on its balance sheet, announced $5 billion in buybacks during its last quarter, and pays a dividend yield over 2%. Thus, in a down market, Apple is a cheap, fast-growing dividend stock with a lot of catalysts for the remainder of the year.
At $507, Apple's upside appears far greater than its downside.
A cash-rich investment
After returning 135% in two years, how can Yahoo! present safety in a down market? Typically, stocks with large gains tend to get hit hardest in a down market, and Yahoo! has survived this rally with essentially zero growth, thus expanding its valuation multiples.
Still, what makes Yahoo! attractive is not its current fundamentals, but rather an investment in Alibaba, the hottest IPO of 2014 with a market capitalization estimated at $150 billion. It is China's equivalent to Amazon, but much larger and earns the majority of its revenue from advertising, giving it growth potential similar to Facebook.
Many early investors in Alibaba are positioned to become very wealthy on the day of its IPO. Yahoo! is one of those investors. Yahoo! owns approximately 24% of the $150 billion company, meaning its stake will be worth at least $36 billion if Alibaba's valuation increases by the time of its IPO.
Currently, Yahoo! trades with a market capitalization of $37.5 billion, which means its investment in Alibaba is worth as much as its entire company. As the IPO date nears, it would be tough to find someone willing to sell Yahoo! with this amount of cash on the horizon.
A recovery in all businesses
Hewlett-Packard is another stock that many perceive to be a top market performer. However, examining the last two years, Hewlett-Packard has significantly under-performed the Dow Jones, posting gains of just 2.5% versus the index's 30%.
Hewlett-Packard is cheap, and for the first time in a long time, it's flirting with near-term growth. PCs and laptops are forecasted to see gains in 2014, and most analysts project a recovery in this space as household PCs become older.
Secondly, the company's worst-performing sector, services, fell 9% in its October quarter, but the company is still gaining market share, according to Citigroup's CIO survey.
Lastly, HP's hardware unit is thriving, growing 2% year-over-year in its last quarter, and grew its market share by 150 basis points, according to IDC. To better visualize this metric, IBM recently posted a whopping 26% decline in this segment, and HP is largely considered the reason for IBM's weakness .
With that said, HP is still cheap, trading at 0.5 times sales and 4.7 times operating cash-flow. It pays a dividend of 2%, and given its operating improvements, HP stands to thrive in a down market.
While all of these companies look to be great investments, Yahoo! seems to be on a different level.
For as much cash as Apple has on its balance sheet, its cash position is still just one-third of its market capitalization, which is impressive. Yahoo!'s single investment is worth its entire company, and once monetized, this leaves a tremendous amount of upside for Yahoo! to either buy back stock, pay a dividend, buy growth, and it makes the company one of the most attractive acquisition targets in recent memory.
In January, Alibaba hasn't become too hot of a topic, but in the next three months, the speculation will heat up. and considering its growth, it will be very interesting to see how underwriters price this company, given the success of Twitter. This speculation alone, and the soon-to-be fundamental gains is sure to create a lot of excitement regardless of the market in shares of Yahoo.
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The article 3 Good Tech Stocks for a Bear Market originally appeared on Fool.com.Brian Nichols owns shares of Apple and Yahoo!. The Motley Fool recommends Apple and Yahoo!. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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