Tech and IT Stocks Show Wall Street Buying Opportunities
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is no doubt that in an up market you will find sectors late to the market rally party. Tech and IT stocks such as Microsoft (NASDAQ: MSFT), Nokia (NYSE: NOK), and Computer Programs & Systems (NASDAQ: CPSI) strengthen the case for finding high quality and value in a rising market.
Since the first quarter of 2012, year-over-year profits for tech and information technology companies have been falling to the tune of 2%, according to Bloomberg News. But don’t let that fact stop you from looking into this broad sector. Valuations have been decreasing as well, shown by the decrease of the price/earnings ratio of the tech sector to about15, which is one percentage point below the average price/earnings ratios for the whole S&P 500. The average price/earnings ratio fell from 24 in 2007, meaning even with the rebound, tech and investment technology stock prices are now about 40% below where they should be compared with the market at similar levels in the past.
With stock prices down, James Paulsen, chief investment strategist at Wells Capital Management, says, “They [tech and IT stocks] are getting to be really reasonable values.” This comment is a nice way of saying that computer and information technology stocks have been among the stock market’s worst performers. As the S&P 500 climbed over 15% since April of 2012, the tech sector saw a net 2.5% return in the same period.
Buyout rumors have also begun to take place. In May, it was rumored that Intel was purchasing AMD, which led to a short squeeze and buying frenzy in AMD, pushing the stock well off its 52-week lows. The news of Yahoo! buying Tumblr and looking at Hulu afterward also has some brows raised.
It seems like a distant memory the last time there was a buying frenzy in Silicon Valley. If serious horizontal and vertical consolidation was to happen in the tech and information technology sectors, we would be safe in placing our funds into those sectors as mergers and acquisitions form a solid foundation of valuation to place your investments upon.
For instance, a closer look at Honeywell and ActiveCare’s relationship may prompt one to wonder why there hasn’t been any consolidation there. Since both are in the patient monitoring side of information technology, and ActiveCare has become the number-one provider of cellular glucometers—blood glucose monitoring devices—in the world, they are an obvious target for acquisition for Honeywell’s expansion initiative into this large—relatively untouched by big chips–market.
A fossil or a sleeping giant?
Microsoft is always on the list of buying, selling, trading, and all types of playing around from the big funds and small investors alike. There’s good reason for it: Microsoft is still the tech and IT bellwether.
Many call Microsoft a “dinosaur,” but even the meteors from companies such as Apple and Google have yet to make this species extinct. And as a tried and true bellwether, Microsoft has predictably shown us a flat, boring tech and information technology market as its returns mirror the S&P technology index moving average returns for the past five years.
For the quarter ending June 2013, Microsoft is expected to bring in $20 billion in revenue, which is an excellent 15% increase year-over-year. And for the 28 analysts covering the stock at the major wires, the consensus is that Microsoft will take this quarter’s numbers and transform them into over 28% growth for the year, which will outpace the projected bottom-line growth of the S&P by about 30%.
Going into this summer and launching during the 2013 holiday season, Microsoft should prove to the masses that its products are just as enviable as Apple’s. They’ve fixed what Steve Ballmer precipitously stated about Windows 8, calling it a “bet the company” moment. The user backlash prompted Microsoft to the tried and true “keep it simple stupid” model of product development. So as the 2013 holiday and shopping season approaches, Microsoft will have a fresh array of products to hit the shelves, including the new XBox One.
Microsoft is a buy at today’s prices. With a $0.92 per share dividend, and $85 billion in assets, we get a stock that’s held up to everything the markets could throw at it since 2001. I’d say Microsoft has a lot to gain, and very little to lose.
Better late than never, Mr. Nokia
If you hadn’t already have seen Nokia’s surge against Apple and Samsung, you probably have been living under a rock. The chief of Nokia, Mr. Stephen Elop, has launched a new phone advertised to directly assault the iconic iPhone and neuve riche Galaxy.
Nokia also has climbed aboard the redesign of the camera smartphone to meet consumer’s demand for them vis-à-vis digital cameras. According to DS Rawat, a honcho with India’s technology sector’s government oversight, there’s a 92% probability a consumer will search for a better camera in a smartphone rather than a forking over money for a digital camera.
The convergence of technology will fare well for this once-hot, not-hot, now-warm cellular device maker. With BlackBerry still reeling, Apple phones slowing, and Samsung reaching a plateau, my bet is that Nokia reemerges as a leader in the cellular industry, and in a big way. Its namesake already has taken a cavalier stance against its rivals by using the Windows-based phones as a launching pad through Nokia’s hardware contributions. As a matter of fact, Nokia has tripled year-over-year growth and accounted for approximately 79% of all Windows smartphone sales.
Thankfully, Nokia presents an ample buying opportunity in spite of the major traction the business has. The stock is trading 25% off of its 52-week high and is building a solid trading base at $3.00. Investors in general have not given Nokia its just due, and point to the negatives on the company’s financial statements. This current quarter will surprise many, in my opinion. As big funds and tech-heavy hedge funds continue to take more “risk on” trades, Nokia should be on the A-list of stocks to buy in those funds. My advice: get in before they do.
Bet on Healthcare IT companies to bring home the bacon
Who said that buying a great, undervalued company with excellent profit and earnings, along with a strong dividend, is impossible? Look no further than Computer Programs and Systems. They are a medical data company that has benefited from the new Obamacare laws.
Free cash flow for this company has increase 28% to $28.7 million on 2012. They paid a healthy $1.00 per share dividend in 2012 and raised the dividend to $2.04 per share in 2013. They are expected to have revenues come in for fiscal 2013 ay around $200 million, while earning over $2.50 per share.
At the close of Friday, June 7, 2013 trading, the stock’s value was $50.40, which relates to a 4% dividend yield. Healthy company, healthy stock, healthy buy.
Computer Programs and Systems will continue to benefit from the medical data information technology due to higher standards in reporting as well as a need to consolidate data and communication to offset higher healthcare monitoring costs. Expect bigger things from this company as the year progresses, and also expect the stock to turn your investment portfolio bright green.
Information Technology and Tech is so…2013
Personally, I don’t remember the time info tech companies were headlined as major buys. That fact is buttressed by the paltry returns the sector has given us while the rest of the market takes off.
What we should take note of is that while others are making gains and taking profits, they have to put the funds somewhere. Technology and information technology stocks are widely untouched, and make bargain-hunting funds like SAC and Sidus Investments in New York drool.
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Michael Mandala has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!