Tech stocks could be one of the best sectors to invest in for the next couple of years. Many tech companies have cash-rich balance sheets, which lowers risk and also increases the likelihood of mergers and acquisitions in the sector. Tech companies also have better potential for growth, especially when compared to other industries which are still being weighed down by the weak global economy. Another reason to consider tech stocks now is because of the upcoming launch of Microsoft's Windows 8, which some analysts expect will be available around May or June.
Experts at Forrester Research who have studied past Windows upgrade cycles and the current version of Windows 8, believe that the launch will be a success. Forrester Research states:
We don't think Windows 8 will be skipped by workers. Why? It's an enabler for those who want to use multiple devices, such as a tablet, smartphone, and a PC, and we believe that the workers who value tight integration between their devices are highly influential people in many organizations, which means Windows 8 stands a good chance of being driven by IT consumers more than Vista was.
This and other early indications look promising for Microsoft and other major tech companies. Here are a few tech stocks that offer substantial upside potential, based on cheap current valuations and the catalyst of the Windows 8 upgrade cycle:
Dell Inc., (DELL) is one of the world's largest PC makers, and that means it could be poised to benefit significantly from the Windows upgrade cycle later this year. Even now, Dell is posting solid financial results. Dell recently announced revenues of $62.1 billion for the 2012 fiscal year, and record enterprise solutions and services revenues of $18.6 billion. This resulted in earnings per share of $1.88 (GAAP) and $2.13 (Non-GAAP) for fiscal year 2012. With that type of earnings power now and growth expected to accelerate, this stock looks deeply undervalued as it trades for just about 8 times earnings. Dell shares have been trending higher in 2012, but have seen a recent pullback and are worth considering around $16 per share.
Here are some key points for DELL:
- Current share price: $16.40
- The 52 week range is $13.29 to $18.36
- Earnings estimates for 2012: $2.13 per share
- Earnings estimates for 2013: $2.18 per share
- Annual dividend: none
Hewlett-Packard (HPQ) is also poised to benefit from a "refresh cycle" that the Windows 8 upgrade might unleash. This company could see a revenue boost as it manufactures a range of technology products which includes printers, computers, software, and more. It also provides IT services like consulting and other business solutions. This could be one of the most undervalued blue chip stocks in the market. The company has been reporting profits, but investors have been selling the stock due to heavy management turnover in the last few years in the CEO position. Former eBay, Inc. (EBAY) CEO Meg Whitman recently joined Hewlett Packard as CEO a few months ago, and the company could be poised to regain investor confidence. The stock is not priced for any growth now as it trades for just a small premium to book value which is $19.41 per share. Plus, the stock trades for less than 6 times earnings, while the average stock in the S&P 500 Index trades for over 12 times earnings. Longer-term investors should consider building a position in this stock on dips. While waiting for higher prices, investors will be paid a solid yield of 2%.
Here are some key points for HPQ:
- Current share price: $23.50
- The 52 week range is $21.50 to $41.80
- Earnings estimates for 2012: $4.04 per share
- Earnings estimates for 2012: $4.42 per share
- Annual dividend: 48 cents per share which yields 2%
Xerox Corporation (XRX) is a leading designer and manufacturer of printers, copiers, software, and other related products. Xerox also offers business solutions such as IT services. Xerox has about 9,400 active patents and it has developed a number of tech breakthroughs in the past. This stock is trading at just about 7 times earnings and even below book value which is $8.88 per share. Xerox is likely to benefit from increased printer and software sales when the Windows upgrade cycle hits, and it also could see increased IT consulting revenues as major systems are replaced. Another potentially positive catalyst for the stock could be future increases in the dividend. Xerox earnings are about 6 times the level of the dividend and that means there is plenty of room for the company to boost the dividend in the future. These shares look like a low-risk way to invest in tech and the stock should be considered on dips.
Here are some key points for XRX:
- Current share price: $8.25
- The 52 week range is $6.55 to $11.03
- Earnings estimates for 2012: $1.13 per share
- Earnings estimates for 2013: $1.24 per share
- Annual dividend: 17 cents per share which yields 2%
Microsoft Corporation (MSFT) is really starting to develop momentum and this "old tech" company is transforming itself in the eyes of many investors. It is a leader in the video game market with the Xbox gaming console, and the revolutionary Kinect controller. It also is a leader in video conferencing with Skype. Microsoft is a significant shareholder in Facebook with a stake that is now worth about $1.4 billion. Microsoft plans to launch "Windows 8" which is expected to offer functionality that will integrate and work on many devices like laptops, desktops, tablets and mobile phones. Windows 8 is likely to create a major upgrade cycle for the tech sector, and that could lead to big profits for the company. With the stock trading at just about 10 times forward earnings, and a balance sheet that can support future increase in the dividends, this stock is worth considering for future gains.
Here are some key points for MSFT:
- Current share price: $32.19
- The 52 week range is $23.65 to $32.95
- Earnings estimates for 2012: $2.69 per share
- Earnings estimates for 2013: $3.01 per share
- Annual dividend: 80 cents per share which yields 2.5%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long HPQ.