BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Tech Stocks Seen As Next Market Leaders: MSFT, QCOM, EMC Are S&P's Top Picks

Following
This article is more than 10 years old.

It's back to the future with the resilient technology stocks. They may be the best choices for growth and solid returns amid the market’s fickle mood. Already the group is demonstrating strength even in the face of market uncertainty.

 The tech group was one of three sectors that spearheaded the market’s advance year-to-date in this unpredidtable volatile environment. The telecom group led the top three winning sectors within the S&P 500 stock price movers, chalking up a gain of 11% during the period, followed by consumer discretionary stocks advancing 10.5% and technology gaining 10.4%.

 But of the three sectors, the techs are bound to sprint to much higher ground, according to S&P analysts. Predictably, Apple (AAPL) led the tech advancers by posting a hefty year-to-date gain of 42.6%.

 “The information technology group is projected by the S&P Capital IQ  to register above-market earnings-per-share growth in 2012 and 2013,” says Sam Stovall, S&P's chief investment strategist. So the S&P Capital IQ’s Equity Strategy Group on June 21, 2012, upgraded the S&P 500’s information technology sector to an overweight rating from market-weight. 

The group is clearly undervalued, he says, as it continues to trade at nearly a 5% discount to the S&P 500-stock index, and sports only a 0.7 times PEG ratio, the lowest among 10 sectors in the S&P 500, says Stovall.

Moreover, “upcoming new product introductions, historically weak seasonal that may offer a potentially favorable entry point, and increasing dividend payouts add to the sector’s appeal,” says Stovall.    

Equally important, S&P’s technical opinion of the sector, says Stovall, “is increasingly constructive.” So which of the many tech stocks are on top of Stovall’s favored list? The  three stocks that he favors the most, says Stoval, are:

Microsoft (MSFT), the world’s largest software company which announced on June 18, 2012, a new product called Surface Tablet, aimed at the growing tablet computer market that's dominated by Apple’s (AAPL) iPad;

Qualcomm (QCOM), which develops products and services based on its advanced wireless broadband CDMA technology; and

 EMC (EMC), one of the world’s largest suppliers of storage systems for corporations and government entities worldwide.

All three have been rated by S&P Capital IQ as strong buys, whose quality rankings are B or higher, with a fair value, or quantitative rating, of either a buy or strong buy.

 Microsoft, now trading at $30 a share, carries S&P’s highest rating of "strong buy" based on valuation as well as on the anticipated release of higher-margin products, specifically Windows 8, Office 15 systems, and the new Microsoft-engineered hardware device -- Surface Tablet. Analysts describe Surface as straddling the line between tablet and PC by featuring a tablet form with a multi-touch keyboard and USB port. 

“It is part PC and part tablet, “ according to John DiFucci, tech analyst at J.P. Morgan Chase, “which he says has a chance of achieving some commercial success,” although  many details have yet to be announced.

Microsoft is clearly undervalued, “trading at below 10 times our fiscal 2013 estimate (of $3.13 a share), a notable discount to major market indices and peers,” says Angelo Zino, tech analyst at S&P Capital IQ.

“We believe Microsoft’s core business remains solid, on healthy enterprise spending -- with the biggest near-term potential catalyst being the eventual launch of Windows 8, which should help Microsoft penetrate the Ultrabook, tablet, and smartphone categories,” says Zino.

He sees the stock climbing to $37 a share within 12 months, in part because he expects big positive changes at Microsoft. Zino notes that Microsoft has been slowly shifting its business strategy, from a PC-centric computing environment to a computing platform in which diverse devices will access information on the Internet, or what is termed as “cloud computing.”

Zino expects Microsoft in the coming years to focus on creating seamless user experiences across multiple devices – from PCs to cell phones, to PDAs, to home entertainment consoles and devices—“for all the various tasks users engage in.”

He forecasts Microsoft will earn $2.68 a share fiscal 2012 ending June 30, and $3.13 in fiscal 2013. And he expects a gross margin of 76% in fiscal 2012 and 77% in fiscal 2013.

Qualcomm has been upgraded by S&P to strong buy from buy based on price weakness, as t

he stock traded down to $55 on June 22, 2012, from $59 on June 12, 2012. “We expect Qualcomm to benefit from strong continued migration to smartphones as well as from growth from tablets and light laptops,” says Esther Kwon, analyst at $&P. And for the longer term,  Qualcomm should “potentially benefit from growth in the connected home, or smart TVs,” she adds.

 The analyst, which has a 12-month stock price target of $81 a share, figures Qualcomm will post earnings of $3.25 a share for fiscal 2012, ending Sept. 30, up from fiscal 2011’s $2.70.

 EMC, whose products and services are used in a variety of computing platforms that support important business processes, such as data warehousing, electronic commerce and content management, is starting to snap back after falling to $22 a share on June 4, 2012, from a high of a 52-week high of $30 in late March 2012.

Now trading $24, S&P, which rates EMC a strong buy,  expects the stock to continue rising, to as high as $36 over the next 12 months.

 “Our strong buy recommendation reflects our view of several positive long term trends,” says Jim Yin, S&P analyst. He is confident that demand for data storage will remain strong, driven by higher usage of video and electronic record keeping. “We see strong interest in cloud computing and virtualization,” says Yin, which he believes will benefit EMC given its majority ownership of VMWare Virtual Infrastructure, the largest provider of server virtualization software. VMWare's revenues grew 32% in 2011, accounting for 19% of EMC’s total revenues. VMWare provides software solutions that help companies cut costs in their data center operations.

 Yin says EMC is gaining market share, particularly in small and medium-sized businesses with its new products in unified storage and data backup. “Despite our concern about a slowdown in the global economy, we think growth will be driven by increased adoption of cloud computing,” he says. EMC should continue to gain market share overall, he adds, because of the company’s broad hardware and software offerings, and its recent acquisition of Isilon Systems, which has a strong presence in the small to medium-sized businesses. Yin forecasts EMC will earn $1.78 a share in 2012, up from $1.51 in 2011, excluding acquisition-related costs.