The Technology SPDR (XLK) was down 1.4% during the June 2011 quarter, while the S&P 500 was down half a percent. Industries included in the sector include Internet software and service companies, IT consulting services, semiconductor equipment and products, computers and peripherals, diversified telecommunications services and wireless telecommunications services. Alternative energy companies were not included as these will be analyzed separately in another article.
Of the approximately 950 stocks in the technology sector, 41 stocks trading above $1 at closing on June 30th went up more than 25% during the quarter (see Table). These stocks were analyzed to determine if they would go up more in price, or if they would reverse their gains going forward. The following are the best ideas based on that analysis.
Buy Level 3 Communications (LVLT): LVLT operates one of the largest Internet backbones in the world, it is one of the largest providers of wholesale dial-up service to ISPs in North America and it is the primary provider of Internet connectivity for millions of broadband subscribers, through its DSL and cable partners. Furthermore, it provides a wide range of communications services over its mile broadband fiber optic network including IP services, broadband transport and infrastructure services, and patented soft-switch managed modem and voice services. The stock was up 66% for the June quarter, and it was up 149% year-to-date (YTD).
The stock has been strong recently, rising over 150% from below $1 in December 2010 to $2.50s. This has been driven by a turn-around in the company’s fundamentals, optimism around the company’s acquisition of Global Crossing Ltd (GLBC), and a favorable outlook for content delivery networks (CDNs) such as LVLT due to the expected strong growth in internet and mobile traffic. Specifically, the acquisition of GLBC will give it a wider global footprint; it will give LVLT a foothold in the burgeoning Latin American market; it will strengthen LVLT’s enterprise service offerings by adding to them an enhanced set of collocation, CDN and global IP/VPN services; and it is expected to result in annual cost savings due to synergies of $300 million,. However, the deal faces a number of hurdles due to competitive and also national security, law enforcement and public safety concerns.
We believe that while the stock may have temporarily run ahead of itself after rising 150% since the end of the year, there is additional upside in the long-term and we would look toward accumulating shares on any dip below the $2 range. Furthermore, high alpha or guru funds are extremely bullish on LVLT as together these funds held $926 million or 25% of LVLT stock at the end of the March 2011 quarter. Guru funds with large positions in LVLT include Southeastern Asset Management Inc. ($694 million), Fairfax Financial Holdings ($205 million) and Blue Ridge Capital Holdings LLC ($27 million).
Quantum Corp. (QTM): QTM is one of the world’s leading storage suppliers in the markets it serves: desktop tape drives, tape media products, tape automation systems, and disk-based backup systems for networks. Furthermore, it is also the leading supplier of high-end hard disk drives. The stock is up 31% for the June quarter, and it is down 11% YTD. QTM trades at a forward price-to-earnings ratio (P/E) of 13, which is high considering that both revenues are earnings have flattened out. Analysts have a mean target of $3.75 on the stock, above the current $3.16 price; and of the six analysts that cover the stock, four rate it a buy/strong buy and two rate it at a hold. We would stay on the sidelines on this one.
Sify Technologies Ads (SIFY): SIFY is an Indian provider of corporate network and data, internet access and online portal services in India. It is among the largest Internet, network, and e-Commerce services companies in India, offering end-to-end solutions with a comprehensive range of products delivered over a common Internet backbone infrastructure. A significant portion of their revenue is derived from corporate services, which include corporate connectivity, network and communications solutions, security, network management services, enterprise applications and hosting. Consumer services include broadband home access, dial-up connectivity and the iWay cyber café chain across one hundred cities and towns. The stock was up 28% during the June quarter, and it is up 104% YTD.
SIFY incurs losses every quarter, and is up five-fold in the last twelve months, while revenue is up only 5% to 7%. No analysts cover this company, and none of the high alpha or guru funds have a position in the stock. While the company is known more for its online connectivity business, SIFY also leads in online content and services in India. The stock is up recently based on excitement about India expanding its broadband coverage and also an explosion in online content and services in India, both of which would be tremendous positives for SIFY and its peer Rediff.com India Ltd. (REDF). The stocks of both companies are at present trading on the India broadband and internet services story, as the fundamentals do not support the market valuation of either stock. We would not be buyers here based on fundamentals, but neither would we be sellers as the potential is huge for both stocks if the India broadband and Internet services story plays out.
Sell Qlik Technologies Inc. (QLIK): QLIK develops business intelligence software and related applications allowing enterprises to analyze data. The Company’s flagship product, QlikView delivers enterprise-class analytics and search with the simplicity and ease of use of office productivity software. The stock finished up 31% during the June quarter, and it is up 32% YTD.
QLIK trades at an expensive forward 57 P/E, while the company is projected to grow revenues at a 30% growth over the next two years, and earnings are projected to increase from 21c in 2010 to 33c in 2011 and 53c in 2012. Since its IPO in July 2010, it has missed analyst estimates twice, and it was in-line once. Furthermore, it trades at ten-time revenue and at 15-time book value. While revenue growth is strong and earnings are rising, and the company is gaining market share, we believe that at current prices the stock is a bit ahead of its fundamentals, and we would be sellers here.
Other Big Winners: Other prominent big winners in the technology sector included VirnetX Holding Corp. (VHC), a developer of software and technology solutions for secure real-time communications over the Internet, such as instant messaging and VoIP that was up 45% for the June quarter; Telecom New Zealand Adr (NZT) that was up 31% for the quarter; Silicon Motion Technology Ads (SIMO), a Taiwanese designer of micro-controllers, universal serial bus flash drivers, card readers, and embedded flash, that was up 33% for the quarter; Sapient Corp. (SAPE), a provider of business process consulting, IT outsourcing, application development, marketing and data management services, that was up 31% for the quarter; Eight by Eight Inc. (EGHT), a provider of voice, video, and mobile IP telecom services for business and residential customers using VoIP technology, that was up 74% for the quarter; Paetec Holding Corp. (PAET), a provider of local exchange, long distance, and broadband internet services, that was up 43% for the quarter; and IPG Photonics Corp. (IPGP), a manufacturer of fiber optic lasers, amplifiers used in materials processing, telecom, medical, and measurement markets that gained 26% in the June quarter.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.