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.
Valuation plays
The raging success of Apple's iPad has pressured already slowing PC growth … and the stocks of two companies that own the key intellectual property in PCs. I think the concerns are overblown and these two stocks are undervalued
Intel
What's more, management insists that PC sales in emerging markets are being undercounted because of the higher share that unbranded PCs garner in less developed markets. I agree: Unlike PCs, microprocessors cannot be designed and built in dorm rooms and garages. Thus, Intel, along with competitor Advanced Micro Devices
Analysts are forecasting 11% annualized EPS growth over the next five years for Intel, yet the stock trades and a paltry 9.3 times P/E ratio and has a whopping 4.1% dividend yield. That makes Intel a nice defensive stock with plenty of upside opportunity.
Microsoft
Analysts are forecasting 10% annualized EPS growth over the next five years for Microsoft, yet the stock trades at a 9.4 P/E ratio. Its dividend yield doesn't approach Intel's but does beat the S&P 500's 2.1%.
The following tables show how these two stocks stack up versus two high-growth tech stocks -- VMware and ARM Holdings -- and two attractively valued tech greats -- Apple and IBM -- that I'm also looking to scoop up from the bargain bin. Both Intel and Microsoft have grown EPS at least 30% over the last 12 months … at the same time the iPad was accused of slowing PC sales growth.
|
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. Intel and Microsoft appear poised to outperform the market no matter what the future holds. If the economy does turn down, their low valuations and dividends could make them good defensive stocks.
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:
