U.S. markets are rallying to new highs this week and that has pushed a lot of names to new 52-week, multi-year, and in some cases, all-time highs. Stocks have done quite well in the new year, and most indexes are trading at levels that analysts currently predicted we would see at the end of the year. We are due for a pullback, and that would be healthy for the markets. A nice pullback of say 5% would gear us up for the next leg of the rally. Here are five names to buy on their next pullback.
Apple (NASDAQ:AAPL): There is no company doing as well right now as Apple. The company recently blew out earnings expectations, and still has plenty of growth ahead of it, mostly from China. Apple is almost going up in a straight line these days, and it seems like the stock wants to go to $500 very shortly. It might very well do that.
But if Apple starts to pullback, you need to be ready to pull the trigger. Apple will continue to blow out estimates, and there is the possibility that during this year they will either start paying a dividend, start buying back stock, initiate a stock split or any combination of the three. Apple likely at this time has over $100 billion of cash and investments on its balance sheet, and that is plenty of financial flexibility to do something.
Apple is currently projected to do 45% revenue growth in fiscal 2012, which ends in September. That's about $157 billion currently, and if they do put out a new iPad, and perhaps even a new iPhone, does anyone think that number won't be hit? In my latest Apple article, I stated my current revenue estimate for the year is $160 billion, and I probably will take that number up going forward. Apple is currently trading at less than 11 times fiscal 2013 earnings expectations, and we know that estimates are going to go up as they keep reporting.
Even as Apple has gone higher and higher, analysts have almost seemed to raise price targets just as fast. The current average price target for Apple is $565, with the median price target at $582. That represents plenty of upside left for the name, and those are just the middle numbers. There are plenty of analysts with $600, $650, even $700 price targets. Apple can go much higher from here, especially if it splits or starts using some of that cash hoard.
So what's the best thing to do with Apple? Well, there are a few options to choose from. First, buy the stock outright. Figure out how much you want to purchase, and at what level you want to get in at. Sure, you could enter here at $485, but if we do get a pullback you will be able to get it cheaper.
A second option is a little riskier and involves more speculation and financial flexibility. This involves selling Apple put options. For instance, you could sell a July $470 put, currently trading for about $27. How does this work? Well, if the stock ends up above $470 in July, you make the $27, but you don't participate in any further rallies. So if Apple is at $471 or $550, you make $27, and that's it. However, if Apple declines below $470 at expiration, or your options get exercised before then, you are forced to buy the stock at $470. But you've pocketed $27, so your net cost is $443. Barring a total stock market collapse, does anyone see Apple below $443 by July? I would hope not.
Now, if you are already in Apple, or it is too big a position in your portfolio, there are four other names you can add to your core technology holdings on their next pullback.
Cisco Systems (CSCO): Cisco just reported a great quarter, despite a fair amount of other names in its sector recently warning. Cisco is no longer dead money, as the name has rallied almost 50% in the last six months. I've recommended getting into Cisco in the $18 to $19 range.
There are plenty of reasons to buy Cisco. It is projected for about 6% revenue growth this fiscal year (ending July) and next. Also, the company is buying back plenty of stock ($466 million in the recent quarter), and they just raised their dividend by a third, from 6 cents a quarter to 8 cents. At $20, Cisco yields 1.6%, which doesn't seem like much when compared to the next names I'll discuss, but remember, just 18 months ago, Cisco paid no dividend. Give the name another two to three years, and the name could be yielding up to 3%.
Microsoft (NASDAQ:MSFT): Microsoft rallied toward $30 when it reported its latest quarterly report last month, and it has increased another few percent since then. The last time I recommended the name, it was at $26, and after earnings, I said wait for a pullback. I still agree with that thesis. I don't know if we'll see $26 again anytime soon, so I would currently suggest starting a position around $29 and trying to average in below that level.
Microsoft is projected to have similar two year-growth numbers as Cisco, thanks to the strong performance of its Xbox unit. Its Bing search unit is also gaining market share, and they recently completed their acquisition of Skype.
Like Cisco, Microsoft is heavily buying back its own shares, and the stock yields about a percent more than Cisco does. A few months ago, Microsoft raised its quarterly dividend from 16 cents to 20 cents, so another raise isn't likely until the end of this year at the earliest. However, if we do see the name head a little lower, the yield will start marching closer to 3%.
Intel (NASDAQ:INTC): Intel was my top value pick for 2012, and it is up nearly $3 on the year so far. I would rate Intel as a better value pick than Microsoft, because Intel is buying back more shares currently than Microsoft (which has a bigger effect since Intel's market cap is smaller), and Intel pays a higher dividend currently.
Intel's dividend is currently around 3.2%, but it was yielding over 3.5% at the start of the year. If Intel does raise its dividend, it probably will do so during the middle of this year, and the five year dividend growth rate average is 16%. That would equate to about a 3 cent dividend raise if it occurs. I see Intel as more of a value name because I don't think its growth is going to be as expected. They warned about the past quarter and said weakness could continue into 2012. The target entry price on this one is $25. You can start there, and average in as it goes lower.
Qualcomm (NASDAQ:QCOM): If you asked anyone what's the best way to play the iPhone that's NOT Apple, they probably would tell you Qualcomm, which makes chips for the phone. Qualcomm broke the $60 mark after reporting a great quarter, something it has failed to do when reaching this level in the past. Qualcomm is still above the level, but it feels like it wants to go lower (it did a little the day after earnings).
Qualcomm's dividend is less than 1.5%, but it is more of a growth company. Analysts are currently expecting nearly 29% revenue growth for the fiscal year (ending in September), and 11% in the following year. Future iPhones will sustain growth. Analysts believe this name goes to $70, with their price targets averaging about that number. I think you can get this name below $60, and anything closer to $55 would be even better. If you want extra iPhone exposure without increasing your Apple position, go with Qualcomm.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.