Top Tech Leaders to Buy in This Market

By Federico Flom - July 18, 2012 | Tickers: AMZN, AAPL, GOOG, MSFT, YHOO | 0 Comments

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I am interested in companies that have solid future earnings power and are managed by competent people. The characteristic that most impresses me is a company's ability to grow sales and profits over the years at rates greater than the industry average. In order to do so, the company needs to posses products or services with sufficient market potential to make possible a sizable increase in sales for at least several years. These companies are high-quality leaders that I think are attractive to buy at current levels.

The first name in my watchlist is Apple (NASDAQ: AAPL). I think the stock could go to $740 or even more considering that the AAPL tech empire has not reached its zenith. I recommend the stock because the current relatively low valuation seems to discount a too-pessimistic future given moderate smartphone and tablet penetration as well as potential new products. I think that iPad shipments will continue to grow, especially in the education and business markets. In my view, it's only a matter of time before iPad shipments exceed iPhone shipments. The iPad is invading the business market at a much faster pace than the iPhone. Apple also has several product launches for 2012 that could surprise the market. How would the market react if Apple launches a great iPhone 5 or closes a deal to distribute iPhones with China Mobile? I am sure the market is underestimating Apple's earnings power.

The second "tech leader" that I am considering is Google (NASDAQ: GOOG). I think that Google's valuation remains attractive. GOOG has a dominant market share in search, display advertising, and mobile. I like GOOG's sustainable solid 20+% revenue growth and cash flow generation, which I think is one of the best in the whole technology sector. GOOG's current valuation remains attractive despite slower European growth and an uncertain macro environment. 

If I like technological companies with a strong moat that trade at bargain prices, it is essential to include Microsoft (NASDAQ: MSFT) to this list. I think that many investors have considered MSFT as a "value trap" over the past few years, but I belive the tides are finally changing and MSFT is starting to innovate, launching new products and creating better solutions. I believe MSFT has plenty of legs remaining in several of its products (Office 2010, Windows 7, Kinect, etc.), has one of the most promising product cycles (Windows 8, Windows 8 Server, Office 12, etc.) in its history in front of it, and is levered to numerous secular trends (cloud computing, virtualization, big data, etc.). The fact that MSFT is finally innovating coupled with a clear undervaluation in price could create a potential uptrend in the stock.

If I am looking for a clear turnaround story in the technological sector I must mention Yahoo! (NASDAQ: YHOO). Recently YHOO's board made a surprise move selecting Google's Marissa Mayer to become the new CEO just in time for its earnings release and conference call. I view Ms. Mayer's appointment as a clear message from the board that her background in product is more likely to generate long-term revenue growth than a content focus. This is the third time that the YHOO Board has made a choice that suggests that content is not a long-term solution to Yahoo's problems. The Board's last several CEO appointments -- Marissa Mayer, Scott Thompson (from PayPal) and Carol Bartz (from Autodesk) -- all had more technology in their background than content and advertising. I think YHOO is a clear turnarond play that could emerge with a solid management, that I think will finally come from Marissa Mayer.

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