"A good plan, violently executed now, is better than a perfect plan next week." George S. Patton
As we entered in the last trading month of the year, I am preparing my game plan for the year ahead. As part of that preparation, I take a look at each major sector of the market and determine how I want to be positioned to begin the New Year. My typical configuration is to have 50% of my allocation to any one sector in just three core stocks with a few minor positions and trading plays within that sector making up the rest of the sector allocation. This weekend I am looking at the Technology sector.
I want my core positions within a sector to have three common traits. They must have cheap valuations, good growth prospects and there should be nothing on the horizon that could disrupt their business models. For example, I have Intel (INTC) and Microsoft (MSFT) as minor positions in my portfolio mainly for their dividend yields. They also have cheap valuations, great balance sheets and are the market leaders in their core product lines. However, both are challenged by the accelerating migration to mobile devices from PCs. Although both companies are concentrating on delivering new products for the mobile space, it is unclear right now if they will be able to manage this transition successfully. Therefore, I hold them outside my core positions within the sector.
On the opposite side of this spectrum are software makers like Salesforce (CRM) whose revenue growth rates of above 25% annually seem pretty secure for now. However, at almost 80x forward earnings and with a projected five year projected PEG near 4 (3.82), the shares are not investible at these price levels.
The three stocks I believe have all of these core traits and should have solid years in 2013 are provided below. They will not provide the biggest returns in the sector next year, but in my opinion, they are the best bets to provide a good return.
EMC Corp (EMC) - $24.82 a share.
Growth drivers for 2013 - Analysts expect revenues to rise just under 10% in FY2013, similar to the sales increases in FY2012. The exponential rise in the amount of data that needs to be managed in our world is creating demand for EMC's products. EMC is a leading provider of storage products and solutions to meet that need. The company's main competitor (by revenues) is Hewlett Packard (HPQ), which is a poster child for a dysfunctional tech company right now. In addition, it owns 80% of VMware (VMW), the leader in server virtualization software. VMW is expected to grow revenues near 20%, as its cloud-based solutions remain in great demand.
Valuation - EMC sells for less than 13x forward earnings, has a five year projected PEG of around 1 (1.03) and the median price target held by the 36 analysts that cover the stock is $30 a share.
Qualcomm (QCOM) - $63.62 a share.
Growth drivers for 2013 - Unlike Intel or Microsoft, Qualcomm is benefiting greatly from the migration to mobile devices from the PC. It supplies smartphone juggernauts Samsung and Apple, and should continue to be a prime beneficiary for the continued and growing demand for mobile devices. The company gets a third of its total revenues from royalties and licenses. These sales are high margin and help account for Qualcomm's solid return on equity and asset ratios. The company's bright prospects are driving analysts to raise consensus earnings estimates for both FY2012 and FY2013 significantly over the past three months.
Valuation - QCOM sells for just over 13x forward earnings, has a five year projected PEG of around 1 and the median price target held by the 40 analysts that cover the stock is $74 a share. S&P has its highest rating "Strong Buy" and an $82 price target on the shares. QCOM also pays a 1.6% dividend and has more than $12B in net cash on the books.
Apple (AAPL) - $585.28 a share.
Growth drivers for 2013 - It is hard to believe the world's largest company by market capitalization still has substantial growth drivers ahead of it, but in the case of Apple, they exist. First, it seems to have fixed the supply problems with the iPhone 5 which should allow it to manufacture more of these products in the quarters ahead, adding to revenues and profits. In addition, it appears the Chinese government will approve the iPhone 5 this month with approval of the iPad Mini to follow in January. China should be a significant contributor to Apple's revenues in 2013. The iPad Mini also looks like it will be a substantial hit in 2013 and there is always the possibility of iTV in 2013. Analysts have almost 15% sales increases projected for Apple in 2013
Valuation - Despite a record of stellar revenue growth and profit as well as new product launches, the market only values the stock at approximately 10x forward earnings. AAPL has a five year projected PEG of under 1 (.58). This does not take into consideration the over $120B in net cash and marketable securities on the books that the company has. AAPL also yields 1.8% and has the potential and means to substantially increase its dividend payouts in the years ahead.