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 (NASDAQ: AAPL  ) 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 (NYSE: 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 (NASDAQ: CRUS  ) .

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 (NYSE: GLW  ) . 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
Corning has been a pick of Motley Fool co-founder David Gardner thanks to the trends it's set to ride in coming years. Understanding paradigm shifts like those discussed here is a cornerstone of David's own investing strategy, and it's critical to his market-thrashing returns. I invite you to learn more about how he discovers his winners -- just 
click here now to read more.


Read/Post Comments (26) | Recommend This Article (109)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2013, at 5:38 PM, kf6spf wrote:

    "I'll be adding roughly another $1,600 in Apple share to my portfolio tomorrow."

    That's, what? Three shares?

  • Report this Comment On January 09, 2013, at 5:45 PM, stockdissector wrote:

    That's funny, kf6spf.

  • Report this Comment On January 09, 2013, at 6:32 PM, TMFRhino wrote:

    Yup. The real money portfolios are meant to mimic what many beginning investors would be investing in. Not gonna blow anyone away with their sheer size, that's for sure.

    -Eric

  • Report this Comment On January 09, 2013, at 7:27 PM, dividend123 wrote:

    I made more money off Bank of America than apple which i bought at $520

  • Report this Comment On January 09, 2013, at 8:44 PM, kayakmastr wrote:

    The rec for GLW is based on 2 unsubstantiated premises. 1) TV sales will increase. 2) TV's require glass from GLW. Therefore GLW will be a big winner. I can believe #1, why should accept #2?

  • Report this Comment On January 09, 2013, at 9:02 PM, TMFRhino wrote:

    Hey kayak

    Between Corning and its Samsung JV, they have a pretty dominant lead in LCD market share. There's obviously a lot more to it than that... But there's a high level reason. I plan on following up with more articles.

    Thanks for commenting.

    -Eric

  • Report this Comment On January 09, 2013, at 10:50 PM, florence1999 wrote:

    If I add Apple I could only add about 3 shares at the price this stock is but if I bought Corning I could afford to buy more shares. What do you think is the best one to purchase.

  • Report this Comment On January 10, 2013, at 12:55 AM, burlybull1 wrote:

    Try DDD instead of Apple. Outrageous P/E but....

  • Report this Comment On January 10, 2013, at 6:48 AM, ValueSpreadsheet wrote:

    If AAPL would grow 0% for the coming five years, it would still be more than 30% undervalued at today´s price.

    Nick

    http//www.valuespreadsheet.com

  • Report this Comment On January 10, 2013, at 9:00 AM, Groovetoon wrote:

    IMO, Apple is going to have to play nicer with other companies if they want to see Apple TV take off. When it comes to the customizable TV experience I'd look to the gaming consoles, XBox most notably, with its LIVE system, before I'd look Apple's way.

  • Report this Comment On January 11, 2013, at 10:25 AM, mikecart1 wrote:

    kf6spf,

    While I did catch the $1600 when I read the article, and it did seem extremely small, it is still far better than what a large % of people can use to invest in a single stock these days when people typically believe that saving $25-100/month is 'outstanding' when in reality and in this world, it is better than nothing, but that's about it.

  • Report this Comment On January 11, 2013, at 11:01 AM, maniladad wrote:

    ks6spf's comment and florence1999's question may involve a basic, very important point. $1600 is the same amount invested, whether it buys 3 shares of Apple at $533, 130 shares of Corning at 12 or 3200 shares of Claude Resources at $0.50. It's the quality of the shares and the return on the investment, not the number of the shares, that counts.That should be completely obvious but some people miss it.

  • Report this Comment On January 11, 2013, at 12:39 PM, Dealerdeb1 wrote:

    While I wish I had bought Apple years ago it is a stock whose cost outweighs the benefit. I have traded several stocks and made more than I would have with 100 APPLE> I love it but I'm not sure I want that much of my portfo;io on one stock anyway. Better with nice stocks with potential growth and a fat dividend.

  • Report this Comment On January 11, 2013, at 1:10 PM, jazzmaN777 wrote:

    i DON'T KNOW HOW MANY OF YOU CAN AFFORD TO BUY MANY SHARES OF THESE STOCKS, BUT THE AVE. GUY CAN'T.. THE FOOLS NEED TO FIND SOME $5 TO 20 STOCKS THAT CAN BRING IN SOME MONEY..PLEASE!!!

  • Report this Comment On January 11, 2013, at 2:02 PM, susueque wrote:

    I'm with jazzmaN777!!!!

    I haven't bought a recommendation yet.

    Where are the lower cost shares that can show growth and stability?Mybe I'm in the wrong investment company.

  • Report this Comment On January 11, 2013, at 2:23 PM, gene619 wrote:

    Eric,good article BUT,,,,

    the only way for me to own APPL is in fund. Enough said on that...I've owned T for a few years now,it pays a good dividend...I do like CRUS,I'll be watching this one. On GLW,I can't see it really moving.Like you mentioned the price of tv sets is way low and what's new there...they already tried '3D',that's a joke.What next smell-a-vision ?

    keep digin'

  • Report this Comment On January 11, 2013, at 2:26 PM, DLPDLP wrote:

    I'm a fool because I've watched David and Tom's suggestions for 2-3 years now and never acted. I let Fidelity Contra Fund make my decisions for me. And they have been okay, but David and Tom beat them over time again and again. I've recently gone with 3D and Berkshire Hathaway and plan to follow more of their suggestions. I don't know how to get around the higher stock prices like Apple, unless you can somehow buy a portion of a share? I think that can be done. Your broker will know for sure. Good luck and I wish I'd become a true Fool a long time ago.

  • Report this Comment On January 11, 2013, at 2:40 PM, ltmlimited wrote:

    Please tell me where I went wrong with your pick of Dolby. I bought it and have lost $8,000. You guys were really high on this in the past. What happened?

  • Report this Comment On January 11, 2013, at 3:08 PM, ronpat17 wrote:

    There seems to be one common theme running through a number of the above comments, which I

    believe to be 'patience'. I began my journey with Dave and Tom in April of last year, not knowing what to expect, as a novice investor. I am enjoying this experience with the MDP as my guiding light, with an approximate overall gain of 10%. I believe that patience and drive to be most beneficial in making sound investments over the long haul.

    Fool On!

  • Report this Comment On January 11, 2013, at 10:50 PM, OneDayRider wrote:

    The best tip I received from Motley Fool was DDD and I would still recommend it. I think that it is a money maker.

  • Report this Comment On January 12, 2013, at 11:52 AM, cellofool100 wrote:

    I buy stock thru Sharebuilder online. You can buy portions of stocks depending on how much you can invest at that moment. I have an IRA and several accts for my kids. I put away $50/month and When I save $400 I buy stoc. EAch buy is around $4.00. I have followed MF for years and their recommendations have paid off for me. Right now I add to DDD and STratys which has been doing very well. Also Netflix.

  • Report this Comment On January 12, 2013, at 4:04 PM, TCBMan wrote:

    So agree with ronpat17 in one sense. Before patience, however, must come trust in M Fool's David and Tom's integrity, some willingness to take a reasonable risk for gain, and some study of The Fool's recommendations.

    Once all the above come together for you, leading to a buy, comes the patience of which ronpat17 speaks.

    The first investment should be buying into David and Tom's Stock Advisor. Read everything Stock Advisor offers for a few months, and then check out some Fool recommendations that spark interest at other financial sites.

    Choose one and buy outright, or dollar cost average buy through a broker. I buy Amazon, Corning, and Nvidia monthly. On David's rec purchased 77 shares of 3 D Systems DDD at $30 (now in the $50's)) and am exercising lots of patience with Activision, Corning and Nvidia.

  • Report this Comment On January 12, 2013, at 6:02 PM, wittgenwho wrote:

    Eric,

    Thanks for the article. Isn't the other concern with CRUS that Apple has a tendency to replace these kinds of partners rather easily. I don't know if CRUS is an exception, but my sense is that there is a fear the partnership won't last forever.

    I would be interested in your thoughts on this. Thanks.

  • Report this Comment On January 13, 2013, at 1:30 PM, tsugar wrote:

    I agree with Wittgenwho. Have often read recommendations about Apple and other suppliers, who sells 50% + to a single customer. But never a word of the actual risk.

    In the case of CRUS, does anyone have any info on how often Apple ditches/changes its suppliers? Are they tied in for 5 year contracts, or do they only have e.g. 3 months "notice". How easy and likely is it for it to happen.

    Little background would make it easier to decide whether to take the risk or not.

    Thanks

  • Report this Comment On January 13, 2013, at 1:49 PM, TelsaRowe wrote:

    What about mnkd? This guy betting $200k on it

    http://www.youtube.com/watch?v=Ewq1pjXzya8

  • Report this Comment On January 13, 2013, at 1:56 PM, Mega wrote:

    "However, with a P/E sitting around 10, Corning has rather limited downside."

    And backing out excess cash, the adjusted P/E is more like 6.

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