Despite recent turmoil in the IT sector for 2008, I contend that this is now where you want to be. Reasoning here follows that the financial sector is struggling to keep its bad news buried, the housing market is shambles and even retailers are struggling to sustain growth. A move toward tech seems fully logical due to typically strong international exposure, confident balance sheets and the fact that IT stocks hold a historically low correlation to the broader markets. Lets pick some technology bulls.
Consumer Electronics – The Net Fool picks Apple (NYSE: AAPL) Hey Mr. Market, why so down on Apple? The iPod business is fully matured. The iPhone is losing inventory to similar devices. MacWorld was missing its usual superstar prospect. I tell you what, take this news and know that Apple has historically done its best when sentiment is low. Steve Jobs & Co. is my favorite IT pick for 2008. The downside has opened up value in the stock, and I feel they have bottomed!
Looking further into the concerning issues. The iPhone was selling less because of Apple’s push into the new iPod Touch, the analysts at Needham noted that “Apple would have sold close to four million iPhones in its absence.” Add this to the fact that an estimated 25%-30% of iPhones were “unlocked” from AT&T, a number that actually benefits AAPL through the carrier’s headache. While iPod sales were slowed, I feel that the mp3 device is merely in a transitioning phase, and interesting opportunities are now raised in mobile technology.
I feel that AAPL may be a recession resistor. Mac business is healthier than ever, and single-handily offset losses in iPods. Investors are punishing high-end firms like Apple for any disappointments. The stock is 35% off its highs, trading at a premium 24-times-earnings compared to its peer’s 32x and has a PEG of 0.7x. They’ve got the free cash flow we love ($6.78/share est. 2008) and its business segments have never looked healthier. People are hating on this company for no reason. As Warren Buffet puts it: “Be fearful when others are greedy, and greedy only when others are fearful.”
Comm. Equipment – The Net Fool picks Corning (NYSE: GLW) Corning is the company you want for LCD glass panels. This market is thriving with bigger and badder television sets coming out on the daily. Fourth quarter results showed that management feels the same due to continued investment in facilities and solid relationships with market leaders. 2008 outlook was VERY positive and new revenue streams should be found in an estimated 60%+ growth in LCD capital spending. GLW anticipates releasing a new flexible fiber glass material and should see appreciation from the coming adoption of mandated diesel filtration. No major catalyst is driving growth, which is definitely odd, but an attractive valuation recovers most of the risk.
Outside of LCD glass, Corning is still running the table. A new “Gorilla Glass” product that enabled touch-screen entry has become readily sold to handset manufacturers. Corning seems to understand the shift to mobile technology, and is really on the ball. With this in mind, Standard and Poors added: “sales acceleration to 17% growth in 2008, up from 13% in 2007, aided by currency benefits and more importantly due to higher demand for liquid crystal display (LCD) glass substrates from TV and computer manufacturers.” Everything is coming together for Corning, even Verizon is on board, a new buyer of GLW’s “ClearCurve” cable solutions. ClearCurve is the world’s most bendable fiber, 100x more bendable than regular fiber… which is apparently very important. This new technology could unlock huge potential with the support of an industry leader in FiOS.
Corning should be a core technology holding for every investor. They remain inexpensive with a PEG at 0.83x and a forward PE at 13x versus an estimated trading value closer to 20x. There are some risks presented by overcapacity in the LCD glass industry and potentially slowed IT spending. However, I feel as though retailers will continue to purchase the glass for bigger screens, and the fiber for faster internet. If they are overstocking and cannot sell, that is their problem… not Cornings. These guys beat earnings by a penny, and their outlook only improved. They are bulls across the board, and deserve to trade at a premium in my opinion.
Solar Semiconductor – The Net Fool picks First Solar (NYSE: FSLR) After doubting the extreme-growth behind solar technology in January 2008, it seems high time we apologized to powerhouse gainers like First Solar. ThinkEquity Partners gave this great stock a one-word classification, “debottlenecking.” After smashing earnings estimates of 53 cents a share with an astonishing 77 cent gain, they appreciated 30% on the day after increasing 2008 guidance. Don’t let this buy-athon scare you away. We thought the solar industry run-up was finished, and were clearly proven wrong. The year-over-year revenue growth of 280% and strength in EPS suggests stronger future earnings power.
Operating efficiency is one of the primary benefits I see from operation in 2008. Costs per watt ($1.12) averages were down 6% on the year, and a negative currency impact from the Euro was almost entirely overshadowed by economical operations in First Solar’s Malaysia plant. Spots for improvement have been identified, and most analysts feel they can bring home the gold. Most notably, the first and second quarter 2008 should prove to show continued growth on track with 2007 appreciation. Solar companies are all trading at attractive premiums when considering growth. With oil on the move upward, it seems that momentum for green energy will remain strong. Investors should return to the solar arena with strong earnings and demand in mind.
The Malaysian plant’s revamp may have a negative impact on First Solar’s first quarter earnings in 2008. On the other side of the coin, we expect an increase in production and see operating margins supporting at 30%+ levels. I wouldn’t be surprised at all to see more good news in guidance. We expect their PE and PEG ratios to come more in line with the industry, as the current premium they appear to be trading at is a result of explosive growth over the past year. Execution was flawless in 2007, and with nothing but green lights thus far… First Solar makes for a great long-term growth play.
Infrastructure Tech. – The Net Fool picks Akamai (NYSE: AKAM) Akamai is alive and well in 2008. After considering them earlier in 2007, they have continued to display strength in their industry. In a recession-trending market, there is a bit of safety surrounding an internet-based firm. There is VERY strong entertainment and media demand across the internet, and Akamai is just the company to deliver the goods. AKAM posted a big jump in profits during the fourth quarter earnings call, which handily beat analyst estimates. After increasing guidance into 2008 with continued streaming media demand on the net, it is becoming hard to spin this company negatively.
Akamai Technologies has had an amazing run up over the years. Frustrating the bears once again on their last earnings conference, AKAM got a boost off of their 52-week lows. They’ve now extended their streak of sequential revenue and profit growth to 20 consecutive quarters! What’s more, their balance sheet is as healthy as ever; they have once again increased free cash flow to $634m from $566m. With a leading role in a thriving content-delivery market, analysts such as Canaccord Adams suggest the potential revenue and earnings growth “in excess of 30% for the next several years.”
The valuation of Akamai is contested often by analysts over whether they are cheap or in-line. I believe they are to the cheap side seeing as how the are off about 45% from their 52-week high and are trading with a PEG of 0.7x. I might be tempted to test the waters if they fall under $32. They are trading at a slight premium in price-to-earnings terms, but I feel this is more than merited as they seem to be a confident recession holding in information technology. With price sensitivity expected to fade along with lowering bandwidth costs, it would appear to be Akamai’s market to steer over the next few years.
That’s it for information technology. There are certainly some great stocks to be found in the sector, despite the notion that tech is always more volatile and dangerous than financials, conglomerates and the like. While February is a historically poor season for IT, I wouldn’t mind getting my march shopping done a bit early with a lot of negative sentiment unfairly dragging down perfectly healthy companies.