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The global credit crisis has led not only to the first worldwide recession since the 1930s, but also left an enormous burden of debt that now weighs on the prospects for recovery. Today, government and business leaders are facing the twin questions of how to prevent similar crises in the future and how to guide their economies through the looming and lengthy process of debt reduction, or deleveraging. In my previous article, "Ray Dalio's Primer On Deleveraging," I wrote about the deleveraging cycle based on Ray Dalio's seminal work, An In-Depth Look at Deleveragings on the subject. Though US (SPX) is undergoing a beautiful deleveraging balancing the options available, investors have found it hard to generate positive returns in this volatile market.

Moreover, with the great deleveraging exercise expected to prolong for the next 6-8 years, it would exert pressure on the equity market valuations. In this market environment, we zero in on two characteristics that would help pick the winners.

  1. "Earnings growth" - key return driver (Preference for growth over value stocks)
  2. Secular or stronger structural earnings growth potential and predictability: (Derived from enduring trends like demographic or technological change)

On an historical basis, growth stocks have tended to outperform value stocks when economic and profit growth is slowing. This has been true as well since the beginning of the deleveraging cycle in 2007. Companies with strong secular growth profile will benefit in the context of scarce earnings growth from their more resilient and less volatile earnings.

Moore's law defines growth opportunity. This sector has historically been growth area because technology companies are driven by both Moore's Law and human creativity. While history suggests that the most innovative companies of one generation will eventually be replaced by the next "new thing," industry-wide growth should remain robust as faster, cheaper and more powerful building blocks spark innovation and growth. In the context of slower economic growth and more frequent credit market "scares" caused by deleveraging, technology companies have two attractive characteristic -

  1. technology used as a tool to combat sluggish revenue growth by enhancing productivity and cost savings
  2. Tech companies' strong, fortress-like balance sheets, reducing reliance on external capital to fund growth.

Intel (NASDAQ:INTC)

(Outperform, TP $35)

  • Core manufacturing advantage should allow the company to maintain its strong position in PCs and Servers while creating incremental opportunities in Networking, Tablets and Smartphones.
  • Top-line growth opportunities should support a LT EPS CAGR of 10% plus and EPS power of $4.00.

Broadcom (NASDAQ:BRCM)

(Outperform, TP $50)

  • Market share in connectivity and 3G, strength at key handset makers Samsung & Apple (NASDAQ:AAPL) (23% of revs), and subsiding 2G headwinds should drive topline growth.
  • Acquisitions & 10GigE refresh cycle should enable gains in a 3x larger Networking SAM, w/ incremental segment revs at 2x corp OpM driving earnings leverage.

NXP Semi (NASDAQ:NXPI)

(Outperform, TP $33)

  • Leveraged EPS growth driven by 1) GM expansion to 52-56% from 44% from redesign/restructuring initiatives, 2) debt reduction from improving cash flows & opportunistic refinancing, and 3) above mkt rev growth driven product cycles in Autos, 32bit MCUs, Core ID programs, and NFC; LT EPS power of $4.00+.

Audience (NASDAQ:ADNC)

(Outperform, TP $22.5)

  • Leader in voice isolation/noise suppression technology in Smartphone's; leverage to leading OEMs AAPL/Samsung. LT opportunity for core technology to be enabler of voice recognition.
  • New TAM opportunities in Feature Phones/Tablets/PCs/Autos support accelerating topline growth and LT EPS power of $4.00.

KLA-Tencor (NASDAQ:KLAC)

(Outperform, TP $64)

  • Highest exposure to Logic/Foundry will help KLAC as INTC spending and Foundry remain strong.
  • Dividend yield of 3.5% can potentially rise as KLAC has increased dividends each year for last 3 years. Valuation compelling at ~8x times 2012 EPS,ex cash.

ASML Holding (NASDAQ:ASML)

Outperform, TP €€42)

  • Litho spending continues to outpace semicap growth and will increase sharply at both 14nm logic and 20nm foundry.
  • High differentiation on immersion gives pricing power and helps maintain margins.
  • EUV adoption can lead to > Eu6 EPS by 2016.

Cymer (NASDAQ:CYMI)

(Outperform, TP $62)

  • Near monopoly on EUV light sources and stable core business.
  • CYMI can potentially have $10 EPS by 2016 as EUV is widely adopted.
  • EUV can see additional orders in 2H12.
Source: Semiconductors: 7 Technology Stocks For Growth In An Age Of Deleveraging