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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. 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.

Investment Options: Moore's law defines growth opportunity. This technology sector has historically been a 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 -

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

Investors can look at the following investment options

Acme Packet (APKT)

(Outperform, TP $36)

  • Dominant position in young, fast growing session delivery networking market, which is leveraged to the collapse of voice and video onto IP networks, should support 20%+ CAGR.
  • View current issues as transitory as opposed to secular.
  • Shares compelling at less than 20x our CY13 est.

CIENA (CIEN)

(Outperform, TP $25)

  • Start of significant shift in optical architecture to 100G transport and next gen switching where CIEN is strongly positioned.
  • Independent of uptick in overall optical capex (not expected), we expect the shift to drive rev acceleration and EPS upside.

F5 Networks (FFIV)

(Outperform, TP $139)

  • While not immune to macro concerns, F5 is levered to strong secular drivers including on-going need for cost effective scaling of data center infrastructure, virtualization, mobile data & application growth, and cloud computing adoption.
  • Security also emerging as strong incremental growth driver.

Apple (AAPL)

(Outperform, TP $750)

  • Multiple growth drivers including increasing share within compute (iPhone, iPad, Mac) and greater adoption of the iOS ecosystem as well as a commitment to cash distributions.

Fusion-io (FIO)

(Outperform, TP $50)

  • FIO's differentiated technology and business model, leverage to emerging web application trends, and high-ROI enterprise solutions will enable healthy revenue growth with solid margins.

EMC Corp (EMC)

(Outperform, TP $35)

  • Secular share gainer in the storage market with margin expansion ahead despite the mid-range push which equates to sustainable mid-to-high teens EPS growth for several years.

Intel (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.

NXP Semi (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+.
Source: Moore's Law For Growth In An Age Of Deleveraging