3 Attractive Tech Buys And 2 To Avoid After Recent Underperformance

by: Rash Menaria

2012 has seen one of the best start for the stock markets in the last several years. The rally is lead by tech stocks with NASDAQ gaining 18% YTD versus 12% gains of S&P500 and 8% gains of the Dow Jones industrial average. For investors who are skeptical of chasing technology stocks after the recent run up, I have examined five large cap technology stocks (see table below) which have missed the 2012 rally. Amongst these stocks, Groupon (NASDAQ:GRPN), Google (NASDAQ:GOOG) and Vodafone (NASDAQ:VOD) are expected to grow at a healthy rate and presents good investment opportunity. However, Hewlett-Packard (NYSE:HPQ) and Research in Motion (RIMM) don't look good because of their declining business.

Company Name


YTD Percentage Gain

Google Inc.



Groupon Inc.



Hewlett-Packard Company



Vodafone Group Plc



Research in Motion Limited



Below, I detail company-specific discussions on each of the stocks:

Groupon Inc. is a good play on migration of local commerce to online channels and growth in usage of mobile and apps. Groupon is a category leader in the online daily deal and social commerce market. A lot of investors are negative on Groupon, citing reasons of increasing competition in the local deals space. But the fact remains that Groupon has defended its position really well, and LivingSocial, its nearest competitor, is one-sixth its size.

I believe investor concerns are misplaced, and Groupon's business is more defensive than what most investors think. Some of the barriers to entry in the business include a large sales force requirement, merchant relationships, subscriber base, accumulated data and technology. Groupon's proven merchant ROI and ability to continually save consumers money adds to its brand. Going forward, I believe some of the concerns on Groupon's business will ease as more of its competitors leave the space, and Groupon's financials improve as it sees margin expansion due to decreased marketing spend and SG&A leverage.

Google Inc. is the world's #1 search engine and online advertising company. Google is trading at a forward PE of 12x. Its EPS forecast for the current year is 42.29 and next year is 49.62. According to the consensus estimates, Google's top line is expected to grow 21.60% in the current year and 19.90% next year. Google has a much undervalued asset in the form of YouTube, where only 3% of current videos are monetized through video advertising.

Given the secular shift of viewers from offline media to online, I believe online video advertising has a big potential. Google's recent announcement regarding the launch of 100 online video channels on YouTube that would feature new original programming is a very important strategic step in the right direction in getting quality content to attract advertisers. YouTube is likely to become a major growth driver for Google in next few years. With over 18% earnings growth, a cash pile of over $40bn and a secular tailwind in the form of online advertising growth, I find Google's current valuations very low.

Vodafone Group Plc. is another good buy in the above list. Vodafone is trading at a compelling valuation of just 10x forward PE and EFCF yield of 11%. Its European business is recovering after a period of heavy EBITDA pressure. Emerging markets also provide a significant opportunity for the company. Recently, the Indian Supreme Court canceled the 2G licenses of several operators. This is likely to lead to sub-scale competitors exiting the market and driving more rational pricing behavior. Vodafone is one of the best dividend stocks, with its dividend comfortably covered and potential for decent topline growth. I see a good chance of stock price appreciation as well as a dividend increase going forward.

Hewlett-Packard Company is an American multinational that provides products, technologies, software solutions and services to individual consumers and businesses. Its products include PCs, workstations, printers and scanning devices. In addition, it provides consulting, outsourcing and technology services, along with enterprise servers and information management solutions.

Revenue slowdown in the U.S. and macro concerns in Europe are hurting Hewlett-Packard's printer business. In addition, PCs and servers are also expected to be areas of weakness for HPQ, as indicated by a difficult demand environment during December. Further, investments in R&D and S&M, and high interest expenses are likely to weigh on its earnings.

Hewlett-Packard missed consensus expectations last quarter. Although the newly appointed CEO Meg Whitman is trying to turn around the company's business, there have been no positive signs yet. Until I see definitive signs of a turnaround in Hewlett-Packard's business, it will be difficult for me to be positive on the company.

With a high exposure to the eurozone, secular declines in printers and PCs, and foreign exchange pressures, I believe that HP's stock price could see a further decline going forward.

Research in Motion Limited is another stock which I will recommend avoiding from the above list. Although RIMM's stock price has corrected significantly and there are rumors about acquisition, I feel RIMM is unlikely to find any suitor.

RIMM's stock price has corrected 75% in 2011 and it is now trading below its book value. Continued market share losses are a serious concern for the company. I see a further downside in RIMM's share price unless there are any signs of market share stabilization. I also don't see any chance of RIMM's acquisition. The three major players, which will likely dominate the complete smart phone ecosystem going forward, are Apple (NASDAQ:AAPL), the Nokia (NYSE:NOK)-Microsoft (NASDAQ:MSFT) combination and the Google-Motorola (NYSE:MMI) combination. It will be very difficult for any other player to stand the competition and hence I doubt if anyone will be interested in RIMM's business/assets.

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