I take a closer look at five top stocks (see table below) in which Morgan Stanley increased its positions in the last quarter. I believe Microsoft, Cisco, Applied Materials and Ebay are good long candidates among the stocks. They are available at low PEs, and have reasonable growth prospects going forward. LinkedIn, on the other hand, has a very high PE and is likely to face a significant competition from Branchout going forward. Hence, I would like to avoid LinkedIn.
Shares Bought Last Quarter
Cisco Systems Inc
Applied Materials Inc
Source: 13F filing
Below, I detail company-specific discussions on each of the stocks:
Microsoft Corp. has seen a positive breakout on the upside from its last two-year trading range. It is currently trading at a forward P/E of 10x. I believe Microsoft is a good medium-term investment. Its cash cushion limits the downside, as well as enables it to make opportunistic acquisitions. In addition, Microsoft is also taking a lot of new initiatives, which can drive meaningful growth over the next few years.
Some of the major catalysts for the stock are the Windows 8 launch, Office 365 gaining traction, and a successful adoption of Nokia (NOK) WP7 phones. I think Microsoft offers attractive risk/rewards for investors looking to hold the stock for the next one year.
Cisco Systems Inc.
Cisco Systems Inc. also looks good after its impressive fiscal Q2 2012 results. Although its guidance for flat FQ3 revenue was below what some investors expected, I believe it has more to do with conservatism on the part of management, rather than any actual slowdown in the business.
The company is seeing strength in its business and it can easily do better than its guidance for FQ3. In the long term, I expect Cisco to continue posting strong results, helped by product cycle momentum in 10GE datacentre, LTE and video. Trading at 10x forward earning, with a 9% FCF yield and a 1.6% dividend yield, Cisco appears to be an attractive investment opportunity.
Applied Materials, Inc.
Applied Materials, Inc. has had a difficult 2011, alongside other semiconductor stocks. AMAT, in particular, faced market share losses and a decline in SSG revenues. However, I believe its Display and EES segments demand has hit bottom now and is unlikely to deteriorate any further.
Higher capex guidance by semiconductor large caps indicate a likely recovery in the semiconductor industry in 2012, and AMAT is well-positioned to capitalize on this situation, driven by a beneficial mix shift in Wafer Fabrication Equipment (PVD, CVD, etch and CMP) and growth potential in solar and flat panel displays. Further, increased innovation in transistor fabrication is expected to benefit AMAT, because of its significant market share in front-end fabrication equipment.
After several quarters of resource diversion and share loss in its WFE, I believe AMAT's share price has bottomed out. AMAT is refocusing on the semiconductor business, with a better WFE mix and improved cost structures across all its businesses. As the semiconductor industry recovers, AMAT is well-positioned to outperform its peers.
eBay reported impressive fourth quarter results with revenues of $3.38 billion (up 35% YoY) and non-GAAP EPS of $0.60 (up 17% YoY) versus Street estimates of $3.31 billion and $0.57, respectively. eBay's core retailing business - Marketplace - seems to be making a turnaround, as it revamped the website, and invested in new technologies recasting it as an online mall.
eBay's payments unit, PayPal, also performed strongly. The active Paypal accounts increased by 13% YoY and Paypal showed a strong increase of 130 bp in its margins. Both these businesses, PayPal and Marketplace, have more than 100 million active users, and the user base is growing steadily.
In addition to strong trends in its PayPal and marketplace businesses, eBay's new mobile payment systems seems to be making headway along with the robust growth of the e-commerce businesses. The mobile payment volume was $4 billion in 2011, five times more than its previous year's volume and is estimated to reach $7 billion in 2012.
Although eBay's guidance for 2012 was mixed, this has mainly to do with conservatism on the part of management, particularly given the eurozone uncertainty. I recommend buying the stock from a medium-term perspective, as the turnaround of its core marketplace business continues to attract more and more consumers.
LinkedIn is a good sell candidate at current levels. I expect LinkedIn to see some serious competition from Branchout going forward. Branchout is LinkedIn's competitor and uses Facebook (FB) as a platform. It now has over 9.3mn monthly active users, up from just 1 mn at the begining of the year. Branchout's rapid growth poses a big risk to LinkedIn. Its user friendly interface and utility in terms of serving both the low-end, as well as high-end job market makes it worthy competition for LinkedIn.
In a recent article LinkedIn Now Has Some Serious Competition, I detailed the risks Branchout poses to LinkedIn. The broader investment community is clearly ignoring this threat, as is evident from LinkedIn's 47% YTD rise. I believe we are in for a big surprise on the downside. I expect a correction in LinkedIn's price - sooner rather than later.