Is it wrong to be fashionably early? I realize that we're waist-deep in the sweltering summer season, but I'm not always the patient type. I can wait until late December or early January to see what all of the so-called gurus think will be the best buying opportunities for next year. You can, too. But why should we? We're both reasonably bright. Well, you must be, anyway.
We don't need a Dick Clark countdown in Times Square to get us started when so many of the trends that will guide 2007 are fairly obvious here in late July. The market's also spewing forth bargain prices that may not be around when the snow starts to fall. So I'm going to review a few stocks that I think will see better days in the future. Look them over, and let me know whether you agree.
Microsoft
I'm not usually all that keen on Mr. Softy. I don't think Microsoft will ever be the same dominant player that it once was. However, at today's low prices, it doesn't have to be. The game has changed, even if the changing of the guard has crawled at a lethargic pace. Open-source alternatives such as Linux haven't really challenged the company's operating-system stronghold, and free or dirt-cheap Web-based applications have only taken little nibbles out of the company's suite of productivity-software titles. Microsoft's Internet Explorer browser, meanwhile, has been able to fend off the nimble and foxy barbarians at the gate, even if there is a slight downturn in its market share.
Now, I'm a realist, and I realize that Microsoft is gradually becoming mortal. As such, I may not want to commit to holding Microsoft for the next decade or two, but I have no problem buying now with a good shot at cashing out higher by the end of next year. Why? Hasta la Vista, baby. Vista is the next-generation version of Windows that has been delayed about as many times as a mid-afternoon flight out of O'Hare. The years have been cruel since the debut of Windows XP, but the release of Vista in a few months will help spur the upgrade business and once again establish Microsoft's operating system as a gateway drug to more potent Microsoft-based application software.
Investors can snap up Microsoft at 17 times this fiscal year's earnings and less than 15 times next year's profitability. Couple that with a cash-rich company that has been flaunting its greenery through dividend hikes and aggressive repurchases, and you have a potent cocktail for capital appreciation over the next year or two.
Dell Computer
If you were shocked to find Michael Dell's PC empire fall to a five-year low this month -- and that fall doesn't compute -- you may already be pocketing some shares of Dell. I couldn't blame you. Dell is a quality outfit with an envy-inducing model of lean operating efficiency that pioneered the art of direct selling.
Dell upset the market last week by lowering its guidance even after it had announced that it was going to disband the practice of providing outlooks altogether. If you're going to buy Dell, do yourself a favor and take a long nap. Let that Dick Clark countdown serve as your wakeup call, because that's around the time that things will start getting better for the company. Once Microsoft rolls out Vista, corporations and consumers alike will flock to upgrade their computers -- not because they will need more powerful systems to embrace all that Microsoft has to offer, but because it's an easy way to snap up a new machine with Windows Vista preloaded. Dell has mastered the art of efficient supply. Mr. Softy will ring the dinner bell to perk up demand. The two will come together beautifully in 2007.
Hewlett-Packard
There are two forces pulling HP in entirely different directions. On the downside, you have the same PC climate that's busy tugging shares of Dell lower. Helping to offset that slide is the turnaround acumen of CEO Mark Hurd, who came in during the spring of 2005 and has been able to bulk up margins while squeezing suppliers to improve HP's financials in what would have otherwise been a shaky sector. In fact, HP has beaten analyst estimates for six consecutive quarters, and the intensity of the market-thumping has improved as Hurd's chieftain chair gets warmer and more comfortably broken in.
Hearing that kind of back story, one wouldn't expect to find HP fetching just 15 times this year's earnings and a mere 13 times next year's projected net income. After all, that's pretty darn cheap for a company that has humbled the prognosticators with ease lately. Once HP hops on the same PC upgrade wave that Dell is angling for, it's going to be "surf's up" for both companies. Gateway
GameStop
Another theme that will drive 2007 growth is the launch of Nintendo Wii and PlayStation 3 later this year. Gamers have been saving up to buy the next-generation systems and its eagerly anticipated tentpole titles, and that means that folks aren't buying new games for fading platforms. The new Xbox 360, meanwhile, is still working off a small user base.
Under that kind of scenario, one would expect leading retailer GameStop to be feeling the pinch, but it's held up pretty well. The stock is trading just 20% off its all-time high from earlier this year, and that's not too shabby when you compare it with the likes of Take-Two Interactive
GameStop promises to be an active retailer over the holidays, and we'll see the results when the company reports its fiscal fourth-quarter results in March of 2007. The good times won't stop there, either, since it takes a good three to four years before video game systems reach their most receptive audiences.
Naturally, you can bet on one of the three platforms reigning supreme and go that route. You can also scour the releases and hope to find the developer with the hot hand. I prefer to just bet on GameStop, a company that will score well no matter who wins the video game war. Along the way, you'll also be picking up a retailer trading at only 15 times next year's bottom-line estimates. That's less than what many of the leading game publishers are fetching with less of the risk.
CNET Networks
If you're wondering whether there's a play out there that can cash in on both the PC upgrades and the next-generation video game systems, look no further than CNET. While the company's TechRepublic, Download.com, and CNET sites have seen advertisers hold back until folks move up to new systems, the same thing is happening over at CNET's popular Gamespot (no relation to GameStop) video game community hub. Everything here should bounce back, rather feverishly, in 2007.
CNET is also one of the dozens of companies being investigated for the backdating of stock options. That has CNET shares trading in the single digits, and it's another reason why 2007 holds much more promise than what we are seeing today in CNET and its growing portfolio of Internet content sites.
2007 starts now
If I'm right, I won't need an "attaboy, Rick" and a pat on my back. It will be an intrinsically rewarding exercise if things go as I expect them to, but it will also be welcome news for many of our newsletter subscribers. Microsoft and Dell are Inside Value picks. GameStop and Dell have been recommended to Stock Advisor subscribers. CNET is one that I have tagged for the Motley Fool Rule Breakers service that I work on. HP hasn't been singled out by one of our newsletters yet, and that's a shame, because it's another great story.
So what are you waiting for? New Year's Eve? Start digging deeper into these stocks today, or find plays in trends that you see shaping the market's direction in the future. The easiest way to beat the market is to stay one step -- and even one year -- ahead.
Longtime Fool contributor Rick Munarriz has been known to show up early and leave too late at way too many functions. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
