June has started with a big selloff and increasing volatility in the market, as Wednesday saw the worse day of the year for the indices and Thursday was a turbulent ride that ended with two of three main indices down. All eyes will be on the May Jobs Report today, which already came out. Any number below 100,000 is sure to put more doubt into investors. The withdrawal of QE2 is less than a month away, taking another leg out from commodities and high beta stocks. The rotation into defensive sectors like healthcare has continued the trend of the last two months. One of the sectors I think should be okay here is technology, especially those stocks with reasonable valuations, revenue growth, and pristine balance sheets. Luckily there are a slew of market leaders spanning the spectrum from chips to hardware to storage to software that meet those criteria. I have five picks to consider. I am calling it my I.M.A.G.E portfolio as it consists of Intel (INTC), Microsoft (MSFT), Apple (AAPL), Google (GOOG) and EMC. I think all are outright buys here. However, given the pullback I see in the market over the summer, I would spread out purchases as the market sells off. More aggressive investors who are comfortable with options should consider a buy write strategy or selling short-term, slightly out of the money puts to acquire positions at a lower price and/or pick up some premium income.
Intel Corporation engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. It offers microprocessor products used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds. The company also provides system on chip products that integrate its core processing functionalities with other system components, such as graphics, audio, and video, onto a single chip.
Valuation and Price Targets: Intel is selling at less than 10 times this year’s earnings and 9.5 times next year’s consensus estimate. Shares yield 3.2% and Intel has raised its dividend 150% over the last five years. It has consistently beat earnings estimates by a significant amount over the past four quarters. I also believe that recent trends in “In Memory Databases” will hasten a more profitable mix of multi-core processors and DRAM server bits per box. Both would be positive for revenues and earnings for Intel and do not appear to be baked into the stock price. Intel sells for $22 a share. Price targets are at $28 at Credit Suisse, $26 at S&P, and Longbow research is at $30.
Microsoft Corporation develops, manufactures, licenses, and supports a range of software products and services for various computing devices worldwide. The companys Windows & Windows Live Division segment offers Windows operating system, Windows Live, and Internet Explorer. It offers Windows operating system, which include Windows 7, Windows Vista, and Windows XP Home, as well as the Windows Live suite of applications and Web services. Microsoft's Server and Tools segment provides Windows Server operating systems, Windows Azure, Microsoft SQL Server, SQL Azure, Visual Studio, Silverlight, System Center products, Biz Talk server, Microsoft consulting services, and product support services.
Valuation and Price Targets: Microsoft sells at just under eight times 2011’s projected earnings of $2.58 if you strip out the approximately $3/share of net cash that is on Microsoft’s balance sheet. Given Microsoft’s growing earnings and revenues, cash flow generation and dividend, core franchises like Office and Windows as well as Bing and Connect, MSFT deserves at least a 11-12 multiple net of cash. This would give a price target of $31 to $34, significantly above the current price of $24.22. Price targets are at $36 at Credit Suisse and $35 at S&P.
Apple Inc., together with subsidiaries, designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. The company sells its products worldwide through its online stores, retail stores, direct sales force, third-party wholesalers, resellers, and value-added resellers.
Valuation and Price Targets: My viewpoint on Apple is well-known. Here are some key highlights on why I think Apple is undervalued. Stripping out cash, AAPL sells for under 12 times this year’s earnings and less than 10 times 2012’s consensus earnings. In addition, Apple consistently under-promises and over-delivers on earnings and revenues. It has crushed quarterly earnings estimates for two years now. Earnings estimates for the second and third quarters of 2011 and 2012 have significantly moved up over the last 90 days. AAPL sells for 0.67 times its expected PEG and is projected to grow revenues by almost 60% in 2011 and over 20% in 2012. The stock currently goes for $346. Price targets are $500 at Credit Suisse, $440 at S&P and Wedbush is at $450.
Google Inc. maintains an index of websites and other online content for users, advertisers, and Google network members and other content providers. It offers AdWords, an auction-based advertising program; AdSense, which enables websites that are part of the Google Network to deliver ads from its AdWords advertisers; Google Display, a display advertising network that comprises the videos, text, images, and other interactive ads; DoubleClick Ad Exchange, a real-time auction marketplace for the trading of display ad space; and YouTube, which provides video, interactive, and other ad formats for advertisers. The company also provides Google Mobile, which optimizes Google applications for mobile devices in browser and downloadable form; and enables advertisers to run search ad campaigns on mobile devices; Google Local, which provides local information on the web; and Google Boost for small businesses to participate in the ads auction.
Valuation and Price Targets: Google sells at just around 12.5 times 2011’s projected earnings of $33.93 if you strip out the approximately $100/share of net cash that is on Google’s balance sheet. Google sells for a PEG of less than 1. Google’s Droid is now the number one smart phone platform and is growing rapidly, which will drive mobile search. The acquisition of ITA software will greatly enhance its travel search offerings as well. The magnitude of its expense growth should moderate in 2012 and revenue should grow north of 20% both for 2011 and 2012. Google is currently selling for $528. Price targets are at $700 at Credit Suisse and S&P, Goldman Sachs is at $690 for GOOG.
EMC Corporation develops, delivers, and supports information infrastructure and virtual infrastructure technologies and solutions. The company’s Information Storage segment offers networked information storage systems and software, which are deployed in storage area network (SAN), networked attached storage (NAS), unified storage combining NAS and SAN, content addressed storage, and direct attached storage environments. Its Content Management and Archiving segment provides software, which optimizes business processes, as well as creates, manages, delivers, and archives information from documents and discussions, e-mail, web pages, images, XML, reports, records, rich media, and application data.
Valuation and Price Targets: EMC goes for 19 times 2011’s consensus earnings and under 16.5 projected earnings for 2012. Revenue growth should be in the double digits for both 2011 and 2012. This data storage leader has a pristine balance sheet with $2B in net cash on its balance sheet. Its VMWare visualization business is growing at over 25% a year. The acquisition of Data Domain in late 2009 helped expand its product offerings and has accelerating BRS growth. In addition, the data storage space should grow faster than overall IT spending in the near and medium term. EMC is currently selling at just over $28. Price targets are at $34 at Credit Suisse, $31 at S&P, and Wedbush as well as Goldman Sachs are at a $33 price target for EMC.