I used the following criteria to generate a list of GARP (Growth at a Reasonable Price) tech stocks for further research:
Market Cap > 2 Billion
Price to Earnings < 20
5-year Avg EPS Growth > 15%
5-year Avg Revenue Growth > 10%
Return on Equity > 15
TTM Net margin > 15
Debt to Equity < .5
From the short list of candidates I investigate further to determine the quality of the earnings (accelerating vs. decelerating), and the consistency of margins and return on equity.
|AAPL||Apple Inc.||Personal Computers||306B||18.53||332.78|
|ALTR||Altera Corp.||Semiconductor - Specialized||13.6B||16.94||42.26|
|BRCM||Broadcom Corp.||Semiconductor - Integrated Circuits||20.3B||18.97||37.96|
|GRMN||Garmin Ltd.||Scientific & Technical Instruments||6.6B||11.52||33.52|
|MRVL||Marvell Technology Group Ltd.||Semiconductor - Integrated Circuits||9.7B||11.37||15.04|
|SNDK||SanDisk Corp.||Semiconductor- Memory Chips||11B||8.54||46.25|
|SYNT||Syntel, Inc.||Information Technology Services||2.3B||19.92||54.32|
Apple (NASDAQ:AAPL): Revenue growth: 36%, EPS growth: 58%, Net margin: 22, ROE: 37, no debt, trailing PEG: .3.
This wildly popular designer of consumer electronics needs no introduction. The iPad and iPhone continue to impress brand loyalists while iTunes has become the largest music distributor in the world.
Altera (NYSEARCA:ALT): Revenue growth: 12%, EPS growth: 27%, Net margin: 40, ROE: 46, debt to equity: .3, trailing PEG: .6.
Altera is the second largest designer of programmable logic devices right behind Xilinx (NASDAQ:XLNX). Broadly speaking, PLDs are standardized out-of-the-box parts that are programmed by the buyer to perform a specific function in a piece of end-equipment such as a network router or DVD player. I hope to provide a comprehensive analysis of Altera in a future post as it's one of my favorite tech stocks.
Broadcom (BRCM): Revenue growth: 20%, EPS growth: 22%, net margin: 16, ROE: 22, no debt, trailing PEG: .95.
Broadcom designs semiconductor chips for communication applications. The company had a stellar year in 2010, coming off a very low base. It remains to be seen whether the company can continue to perform at this level but is worth tracking.
Garmin (NASDAQ:GRMN): Revenue growth: 21%, EPS growth: 16%, net margin: 22, ROE: 20, no debt, trailing PEG: .7.
Garmin manufactures global positioning devices and software. Though the stock made the list based on a couple of red-hot years of growth that boosted its five year average, the company has struggled to maintain profitability lately and suffers from decelerating margins and returns on equity. Investors with a soft spot for turnarounds might consider putting Garmin on their watchlist.
Marvell Technology (NASDAQ:MRVL): Revenue growth: 17%, EPS growth: 20%, net margin: 25, ROE: 18, no debt, trailing PEG: .5.
Marvell Tech designs integrated circuits primarily for data storage, networking and communications. Though its current margins and return on equity reflect the bounce in tech across the board, these two metrics have generally been all over the place. This typically indicates either a highly competitive or cyclical business. In Marvell's case, it's both.
SanDisk (SNDK): Revenue growth: 16%, EPS growth: 22%, net margin: 27, ROE: 27, debt to equity: .3, trailing PEG: .4.
SanDisk develops NAND flash memory cards for consumer devices. Unfortunately for shareholders, it occupies the same uncomfortable space as Marvell - choppy margins and investment returns.
Syntel (NASDAQ:SYNT): Revenue growth: 19%, EPS growth: 29%, net margin: 21, ROE: 28, no debt, trailing PEG: .7.
The smallest of the bunch at the very low end of the mid-cap range, Syntel provides professional IT consulting and competes globally with the likes of Accenture (NYSE:ACN), Infosys (NYSE:INFY) and Cognizant Technology Solutions (NASDAQ:CTSH). This is a stock that continually shows up on my screens and one that I intend to research further as it seems to be a real up-and-comer in this profitable space.
Based on my approach, the best value on this list is Apple. A PEG of .32 is rare for the kind of quality you find in Apple's earnings. I rarely consider the forward PEG because I've found it doesn't improve my investment results. But for those who do, the forward is .8. That's still very reasonable. While the market marches on to the next latest and greatest thing, Apple will continue doing its (highly profitable) thing.
Disclosure: I am long AAPL.