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:
- Mobile.
- 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
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
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
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.
Company |
Revenue Growth, 2009 |
EPS Growth, 2009 |
Revenue Growth, Past 12 Months |
EPS Growth, Past 12 Months |
---|---|---|---|---|
VMware | 8% | (33%) | 38% | 110% |
ARM Holdings | 2% | (9%) | 27% | 39% |
Intel | (7%) | (16%) | 18% | 30% |
Microsoft | (3%) | (13%) | 12% | 33% |
Apple | 14% | 34% | 76% | 90% |
IBM | (8%) | 13% | 7% | 16% |
Sources: Capital IQ (a division of Standard & Poor's), CNBC.
Company |
P/E Ratio* |
Forward P/E Ratio* |
Dividend Yield* |
Price* |
Consecutive Quarters of Beating Estimates |
---|---|---|---|---|---|
VMware | 44.7 | 37.7 | 0.0% | $88.17 | 12 |
ARM Holdings | 44.3 | 38.9 | 0.6% | $24.66 | 8 |
Intel | 9.3 | 8.6 | 4.1% | $20.60 | 8 |
Microsoft | 9.7 | 8.9 | 2.5% | $25.58 | 8 |
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.
Foolish takeaway
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: