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Volatility and high-flying valuations are tech stock characteristics that cause some investors to avoid the sector entirely. However, that's painting with too broad a brush -- and a good way to miss out on some of the best opportunities on the market. While the dangers inherent to buying stocks priced for high growth and the threat of disruption in the broader space make some tech companies a poor fit for portfolios that aim to minimize risk, the sector also hosts standouts that any investor should consider.
With the goal of identifying tech stocks that deserve a spot in any portfolio, we asked three Motley Fool contributors to spotlight their pick for a top stock in the space. Here's why The Priceline Group (PCLN +0.38%), Check Point Software Technologies (CHKP 2.87%), and Cisco Systems (CSCO 2.82%) made the list.
Ready for takeoff
Brian Feroldi: For years I believed that The Priceline Group was just another online travel site, so I couldn't figure out why its stock was always hitting new highs. That all changed in 2010, when I was finally educated about the business. I've since come to believe that this tech stock that belongs in every investor's portfolio.
The Priceline Group has transformed itself into a market darling thanks to its top-notch management team. The company has a long history of making smart acquisitions that have helped to power its revenue and profits higher for years on end.
While you're probably already familiar with several of its brands -- think Kayak, Priceline, OpenTable, RentalCars, and more -- the majority of the company's profits come from Booking.com, the leader in the European hotel market. The company spent years to build out a large network of hotels, which have attractive customers who value selection. In turn, that has encouraged more hotels to sign up, creating an unbeatable competitive advantage.
Looking ahead, Priceline looks well positioned to take advantage of the shift toward online travel. It also boasts a handful of partnerships that are likely to greatly benefit it over the long term. Since the global online travel market is estimated to be worth $492 billion (and growing), I continue to believe that this company's future looks bright.
Value, income, and growth potential
Keith Noonan: With a wide range of investment styles and needs out there, picking a stock that looks to be a good fit for all investors is no easy task, but Cisco Systems has the makings of a top choice, thanks to its balanced components of value, growth potential, and returned income.
Trading at roughly 13 times forward earnings estimates, the stock is priced far below both the network hardware industry multiple of 25 and the S&P 500's average forward earnings multiple of 18, and it's backed by a rock-solid balance sheet. As of the fiscal year ended July 30, Cisco had $65.8 billion in cash and short-term assets while holding $28.6 billion in long-term debt, and the company is adding to its balance each quarter thanks to strong cash flow.
The company posted $12.42 billion in free cash flow in its last fiscal year, up roughly 20% over a five-year period, and strong cash generation is helping the company distribute and grow its dividend while also adding to the books. With an annualized payout of $1.04 and roughly 5 billion shares outstanding, the cost of distributing the company's dividend represents just around 42% of last year's free cash flow -- indicating room for continued growth. Even if near-term payout increases are small, its yield already sits at a chunky 3.3%.
As the leader in the network hardware space, Cisco looks to benefit from the dramatic increase in data load and connected devices brought on by the Internet of Things. It's also building out its device connectivity platform and is poised to be a big player in the development of crucial IoT technologies and services. The company's core routing and switching business is under pressure, which is a key factor in the company's inexpensive valuation, but the stock has lots of room to run if IoT and other emerging business ventures continue to play out favorably.
A data and security stalwart
Tim Brugger: Unlike many of its peers in the data security space, Check Point doesn't "wow" investors each quarter with 30% or 40% top-line growth. So why does Check Point stock belong in every tech stock portfolio? Because even the most aggressive long-term investor should consider a consistently reliable, continuously profitable stock, and that's exactly what founder and CEO Gil Shwed provides, quarter in, quarter out.
Check Point once again delivered in its recently announced third quarter. Despite reporting "only" a 6% jump in revenue, earnings per share climbed 7% including one-time expenses, and an impressive 9% after factoring in costs. The increase in EPS over and above revenue gains is an ongoing theme of Check Point's and speaks to Shwed's strict expense management philosophy. That's something its unprofitable peers can't seem to grasp.
Check Point's strategic objective of building recurring revenue stream via its data center, cloud, and enterprise security solutions is also gaining momentum. Last quarter, Check Point's product and license revenue grew just 1% to $136.9 million. But Check Point's subscription sales soared 24% compared with a year-ago to $98.58 million.
The better news is that Check Point's initiative to increase its consistently reliable revenue streams will continue to rise after its 15% jump in deferred revenue to $889 million last quarter. Check Point lacks the flash of its competitors, but in an industry expected to generate $1 trillion over the next five years, it's one of the few data-security providers investors can rely on to deliver bottom-line results, each and every quarter.
