Jan 6 2014, 12:59pm CST | by Forbes
Last year was a sizzling year for stocks, and though technology and telecom stocks as a group rose only 18%, their were pockets like Internet stocks that soared. PowerShares Nasdaq Internet Portfolio (PNQI), which holds stocks like Facebook, Google and Amazon.com, rose 65% in 2013.
Each year Forbes polls noted investment advisors and money managers in an effort to find out what some of their best investment ideas are for the year ahead. Below is a selection of six technology stocks they came up with among the 35 individual best investment ideas we gathered.
Editor, Forbes Investor
Buy: Rovi Corp. (ROVI)
Rovi is a global leader in technology solutions that power the discovery, delivery, display and monetization of digital entertainment. The company serves cable, satellite, telecommunications, mobile and Internet service providers, consumer electronics manufacturers, and entertainment and online distribution companies including Apple, Comcast, eBay, Google, Panasonic, Samsung, Sony, Toshiba and Verizon.
A strategic decision to not sacrifice profits for volume forced the company to take a more conservative view on the expected level of contract closings for the second half of 2013. This led to two downward revisions of full-year revenue and earnings guidance over the past three months, resulting in a sharp sell-off. But I would not write-off ROVI so quickly.
The company’s desire to obtain appropriate value on potential licensing contracts is the right decision from a long-term growth perspective in my view. And while it may be taking longer to secure these deals than initially expected, I remain confident that they will be obtained. Given its attractive valuation, I expect the stock to rebound sharply once this happens.
Portfolio Manager, Barrack Yard Advisors
Buy: Cisco (CSCO)
One sector in the admittedly expensive U.S. stock market that remains attractive is “mega-cap” IT Companies. They are selling for low multiples of earnings/cash flow. They represent relatively high current shareholder rewards: the dividend plus buyback yields are more than 5% (and the payout ratios are low with room to grow). As a group, they represent high financial strength. Admittedly, they have disappointed investors over the past couple of years but I argue that has been baked into their current valuations: current forward P/E multiples of low teens versus about 20X prior to the Great Recession.
In other words, these firms used to be thought of as growth companies but not any longer. Given that I don’t believe there has been a paradigm shift that has destroyed their business models—particularly for the long product cycle businesses—I think the lackluster growth of the past couple of years is cyclical and not secular in nature. I believe it is timely to buy into this sector due to valuations and to my common sense conclusion: it is hard to imagine the economy growing without a meaningful pick-up in IT CAPEX spending.
My two favorite stocks in this theme are Cisco and IBM.
Cisco is a dominant player in its industry (global telecommunications infrastructure) that has grown by acquisitions and possesses industry leading financial strength. CSCO’s has net cash of some $30 billion, or $5.60 a share, a P/E of 11X and a dividend yield of 3.2%. The dividend plus buyback yield is about 5% and the payout ratio is 33%. CSCO is a highly profitable company and has grown its EPS by 12% over the past 10 years but that growth has slowed over the past few years to something like high single digits. Free cash flow yield is 10%.
Buy: IBM (IBM)
IBM also sells at a discount of 30% to the S&P 500. It has a free cash flow yield of 9% and a dividend plus share buyback yield of more than 7%. IBM’s product cycle is long and it benefits from a blue-chip balance sheet. Historically it has enjoyed net profit margins in the mid-teens and return on invested capital of 20%. IBM has significant economies of scale working in its favor and most of its commoditized businesses have been jettisoned: 86% of its revenues are derived from value-added services and software solutions.
The barriers to entry for potential competitors in its core business are high. I think the longer-term future for IBM could be better than the market expects. If not, a fact remains: IBM has an entrenched position in its marketplace and has grown earnings per share over the past decade by 12% a year, on average, through a combination of efficiencies, share buybacks and modest growth. Paying 12X earnings for that combination seems like a pretty good deal to me.
Editor, The Arora Report
Buy: Applied Materials (AMAT)
Applied Materials, the largest company in the semiconductor fabrication equipment sector, has engineered a transformative merger with the third largest company in the sector, Tokyo Electron (8035: JP). The combined company will be a behemoth worth about $30 billion. Synergies will result in cost savings of $250 million in the first year and $500 million in the third year, but more important is the combined company will gain significant market share.
The semiconductor fabrication equipment sector is likely to grow from $28 billion in 2013 to $37 billion in 2017. The combined company is projected to generate $18.2 billion in revenues and $4.6 billion in operating income in 2017. This translates to earnings per share of $2.40 per share. As a reference, earnings over the last four quarters totaled $0.59. It is reasonable for the market to accord a P/E north of 20 to AMAT in 2017; as a reference, ASML Holding (ASML), the second biggest company in the sector, trades at a forward P/E (FYE 12/31/14) of 20. Based on the foregoing scenario, the stock will be north of $48 in 2017 compared to the present price of about $16.
Editor, Forbes Low Priced Stock Report
Buy: Ballantyne Strong (BTN)
BTN has tons of cash thanks to sales of digital equipment to movie theaters that switched to the new standard. That’s now largely played out and it would have been easy for BTN to blow cash on a “diworsification” acquisition. But instead, BTN made a great accretive purchase: Convergent Corp. with a growth business (digital content for out-of-home advertising, etc.) and an operating profile adjacent to BTN’s network support center that serves digital theaters. This debt-free company still has lots of cash (40% of the stock price) and the stock still has a measly (0.59) price/sales ratio.
CEO, Gerber Kawasaki Wealth & Investment Management
Buy: Apple (AAPL)
Apple is a cheap stock in a tech sector that’s getting very expensive. Apple is dominating the holiday season with its tablets and phones. The refreshed product line is doing much better than expected. I expect Apple’s China Mobile deal to meaningfully add to earnings next year. The real kicker is if Apple comes out with any new product. A TV will bring this stock to new highs. It has an iconic worldwide brand and this company certainly deserves at the minimum the market multiple. I see nice upside next year with or without a television.
Source: Forbes Business
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