3 Computer Stock Buys, 2 To Avoid

by: Mel Daris

Computer companies have been strong earner for many investors. Companies like Apple Inc (NASDAQ:AAPL), Dell Inc (NASDAQ:DELL), Hewlett-Packard Company (NYSE:HPQ), Lenovo Group Ltd (OTCPK:LNVGY) and Microsoft Corporation (NASDAQ:MSFT) offer the desktops, laptops and tablets that many people own and use every day. Below, I will show how investing in these companies can help to pay for the products on which we have all become dependent. I chose these five stocks because they represent a good starting point for analysis of the computer industry.

Apple Inc

In spite of the passing of Steve Jobs, Apple continues to surge, breaking records on the strength of products like the iPad, iPhone and Mac computers. On the verge of surpassing the $500 per share mark, the company's stock has risen almost 40% over the past year, now trading for nearly 25% above its 200-day moving average. Year-to-year revenue has climbed 73%, and quarterly earnings have soared more than 117%. This debt-free, $460 billion giant continues to move forward, making it a great long-term investment.

If predictions are correct, right now could be an even better time to buy Apple stock. Many analysts believe that the market is oversold, and that a 3 to 5 percent pullback is coming. A five percent drop in Apple prices would mean investors could get in at $475 instead of $500. With its one-year target of $568, such a move could allow investors who act quickly to enjoy an annual increase of nearly 25% on their investment. With Mac computers gaining market share, investors need to gain too.

Dell Inc

Dell is one of the world's top developers and manufacturers of netbooks, laptops, tablets, desktop personal computers and smartphones. The $30 billion company enjoyed a solid 2011, registering an 8.6% increase in year-to-year revenue while growing its stock price by nearly 26%. Trading at $17.75 per share, the stock has a 52-week range of $13.29 - $18.20 with a stagnant one-year target estimate of $18. The company does not pay dividends.

While Dell managed a solid 47% return on equity and 52-week increase of 26% on share price, its performance was a bit weak. This was likely due to the lingering effects of the economic crisis and the strong performance of Apple and Lenovo. Although it appears that Dell will start to recover this year, the lack of an anticipated stock price increase and dividend leaves the company at a disadvantage. I would not recommend taking any new positions with Dell at this time, and I advise investors already holding shares to keep a close eye on its performance throughout the year.

Hewlett-Packard Company

Rated by one publication as the 3rd best brand in the world for laptops, Hewlett-Packard Company should be concerned about how it will maintain that lofty position. The company has been plagued by poor sales and serious questions regarding the performance and compensation of its top executives. These questions led shareholders to reject a recent executive compensation program; this move should be enough to scare away prospective buyers going forward.

Although it pays a $0.48 dividend for a 1.6% yield, and the stock is currently trading near $29 per share, the price has fallen nearly 41% in the past year. The 52-week range is $21.50 - $49.12, and the one-year target estimate is a sluggish $30. This lack of profit can be largely tied back to 3.5% drop in quarterly revenue and staggering 91% decline in earnings over the past year. Recovery may be difficult as competitors like Lenovo and Apple cut into its market share, and analysts question the direction of the company. In spite of being a dividend payer, I am currently rating HP as a sell.

Lenovo Group Ltd

While Dell and Hewlett-Packard struggle, Lenovo Group Ltd joins Apple as one of the computer industry's big stars right now. Trading just under $17 per share, the stock has seen impressive growth while the company churns out huge profits. Lenovo is considered second to Apple among the top laptop manufacturers, and Wall Street analysts point to the company's revenue and growth to confirm that position.

Trading near the high of its 52-week range ($10.01 - $17.39), Lenovo is more than $4 above its 200-day moving average. The company has a reasonable price to earnings ratio of 9, and it demonstrated its strong performance with an increase in quarterly revenue of 35% to go along with a rise of 88% in earnings. Its recent success has been attributed, in part, to a new joint venture with NEC Corp (OTC:NIPNF) and also the purchase of German company Medion AG. Lenovo has a very low debt to equity ratio of 15.9, and it is sitting on a $1.55 billion mountain of free cash flow. Lenovo is making high-quality computers, and the response on Wall Street is a good reason to invest in the company.

Microsoft Corporation

While Microsoft does not directly design and build computers, its dominance in application software affects the decisions of every company that does build them. The company's influence on the market is so strong that even rival Apple incorporates Microsoft software into its Mac computers. Trading around $30.50 per share, the stock has been a solid performer, climbing over 12% in the past year while paying out a $0.80 dividend (good for a 2.6% yield). The company has a 52-week range of $23.65 - $30.80, and its one-year target estimate is almost $32 per share. Microsoft is currently trading at 20% above its 200-day moving average.

Analysts point to Microsoft's ability to dominate emerging markets as one of the reasons that it continues to be such a force in the industry. The company is very optimistic about its upcoming Windows 8 platform, and many experts believe that the new software could give it an advantage over Apple even in the iPad-driven tablet market. Microsoft enjoyed 5% quarterly revenue growth last year, and its debt to equity ratio is a very impressive 19. The company's payout ratio is a low 25% allowing it to affordably continue boosting its yield. Solid performance, impressive products and dominance in the marketplace all inspire me to rate Microsoft as a strong buy.

Calculating Success with Computer Stocks

While not every company in the computer sector offers the same level of success, there are some very good choices available for investors. Although I am skeptical about Dell and Hewlett-Packard for their lack of performance, I definitely like Apple, Lenovo Group and Microsoft. These three giants are strong competitors in the computer world and have the financial success that leads to results on Wall Street. I encourage investors to consider moving on any of these three at the present time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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