In a recent report on Technology investments for 2012 UBS predicted that the growth in IT expenditures for 2012 will continue based on below average enterprise capex-to-sales, strength in corporate profitability and the growth in data traffic. UBS is bullish on US technology sector, overweight in Semiconductors, Internet and Communications Equipment and underweight IT services and Office Elec.
Their thesis is based on compelling relative valuation (based on sub-sectors P/E ratio’s standard deviation being away from world IT index P/E, Relative EV/EBITDA) , revenue and earnings growth expectations and bottoming out of key cyclical near term indictors such as capacity utilization, components orders and inventory levels.
The large cap tech business models have become more stable owing to more recurring revenues and the yields they offer (higher cash return to shareholders) when compared against fixed income securities will make investors gravitate towards large cap tech stocks. These are cash rich companies and will also benefit from Tech M&A boom in coming years.
They believe that the beneficiaries of the swift growth in cloud based infrastructure and services will be key industry leaders. Though the cloud computing valuations are a bit higher but a deeper dive in the accelerating relative growth makes the valuations much cheaper. These beneficiaries are as follows:
- Server Virtualization: VMware (VMW)
- Software as a Service (SaaS): Salesforce.com (CRM)
- Web Services: Amazon.com (AMZN)
- Cloud Services: Apple (AAPL)
- Social Collaboration: LinkedIn (LNKD)
- On demand software for Employee Management: SuccessFactors (SFSF)
- Security Space: Check Point (CHKP), Symantec (SYMC), Fortient (FTNT), Sourcefire (FIRE)
More interesting will be to have a look at the companies that have made it to their top 10 Global Stock Picks. Their favorite stocks that trade in US markets are as follows:
Check Point Software Technologies Limited is a company well-known for its VPN and firewall software. It has a market cap of $11.017 billion and the current price per share of $53.40 is expected to grow and reach a target price of $68.00. At a P/E ratio of 16 the stock is undervalued when considered the benefit from the upcoming projected rapid growth in cloud-based computing.
Qualcomm Inc. (QCOM) is a company that designs and supplies communication equipment. Out of all the companies listed on the UBS Investment Research’s most-preferred portfolio, it has the largest market cap, at $85.07 billion. It is currently priced at $51.86 and this price per share and target price by UBS is $70. Qualcomm is one of the most popular stocks among hedge funds (see the 10 most popular stocks).
KLA-Tencor Corp. (KLAC), a semiconductor equipment manufacturing company, has a market capitalization of $7.191 Billion. It is currently priced at $42.08 per share with a UBS projected target price of $60.00. According to UBS, the semiconductor industry outperforms during a post-down cycle and KLAC is the best way to play the growth in semi upwards cycle.
Micron Technology Inc. (MU) is a company known for producing semiconductor devices. Out of all the U.S. based companies on the UBS’ most-preferred list, it has the smallest market cap ($5.4 Billion). This is because its shares aren’t valued high enough and they are being traded at $5.50 but the target price is in north of $14. Billionaire David Tepper had $44 million in MU at the end of September.
UBS also provided a list of their least preferred stocks. These stocks by UBS can provide a good short-selling opportunity for investors. Here are their least preferred tech stocks that trade in U.S. exchanges:
Citrix Systems Inc. (CTXS), a software company, has a market cap of $12 billion. Currently, it is trading at $64.47 per share and out of all the companies listed on the UBS Technology Strategy portfolio, it has the highest price-to- earnings ratio of 23.2.
Computer Sciences Corp. (CSC) provides IT services and has a relatively small market cap of $3.5 billion. The stock is currently trading at $22.93, though the price earnings ratio is in south of 10x but there aren’t enough growth opportunities to but the stock.
NVIDIA Corporation (NVDA), best known for producing graphics cards, has a market cap of $8.5 billion. It is currently trading at $14. Although, NVIDIA is a part of the semiconductor industry and has a relatively low price-to-earnings-ratio, UBS’ analyst is not bullish about it. NVDA isn’t popular among hedge funds. The largest long position is held by D.E. Shaw, $14 million. However, D.E. Shaw hedged this position via a $26 million put position in the same stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.