The technology sector has vastly underperformed the overall market in this year's rally. The sector is now selling for less than the overall market multiple, a rarity. I think if the rally continues, investors will shift out of defensive sectors (Consumer Staples, Utilities, etc…) that have done well but are selling at a premium to the market but will lower growth prospects into higher growth sectors like technology. I think one tech stock that will benefit from this rotation is EMC Corp. (NYSE:EMC), one of the world's largest suppliers of data storage solutions. The company has provided plenty of positive news recently and I see the shares hitting the $30 a share target many analysts have on the stock by end of the year.
- RBC Capital Markets upgraded VMware (NYSE:VMW), which EMC owns 80% of, to "outperform" after the former's analyst day. VMW projected revenue growth would average 15% to 20% annually from 2014 to 2016.
- Longbow also just initiated the shares as a "buy" with a $30 price target.
- Stifel Nicolaus reiterated its buy rating last week on EMC.
- The company recently announced several units called the pivotal initiative will be taken public. EMC will own 69% of the company and VMW will retain 31%. This new company should have $300mm in sales in 2013.
- EMC's CEO stated a dividend is in the company's future even if he believes buybacks provide more shareholder value.
- Cisco Systems (NASDAQ:CSCO) stated in its Q2 conference call that its joint venture with EMC is approaching a $1B revenue run rate (EMC owns 58% of the venture).
4 additional reasons EMC is a buy at $25 a share:
- The company is growing revenues in the high single digits and the stock sports a five year projected PEG near 1 (1.01).
- In addition to owning 80% of VMware, EMC has over $4B of net cash on its balance sheet (around 10% of its market capitalization).
- Credit Suisse has an "outperform" rating and S&P has a "buy" rating on the stock. Both have $30 price targets on EMC. The shares are selling for just 12x 2014's projected earnings.
- The stock is selling in the bottom third of its five year valuation range of P/B, P/E, P/S and P/CF. EMC is also just above a long term technical support level and just crossed its 100 day moving average (See Chart)