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. (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 (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 (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)