Two Tech Stocks To Buy Now

2/15/2010


Sometimes in these pages we get technical, presenting complicated screens or complex valuation models. Not today.

In this story, we answer only one simple question. What stocks should you buy right now?

The Focus List contains our top selections for year-ahead gains. It currently features 16 stocks. Investors who seek to mimic the Focus List should put 22.0% of their equity portfolios into the Vanguard Short-Term Investment-Grade Fund ($10.69; VFSTX) and allocate the rest of the money in equal-dollar positions in all 16 stocks.

FOCUS LIST
—– Quadrix Scores * —–
Company (Price; Ticker)
Value
Quality
Overall
Sector
Industry
Aflac ($47; AFL)
88
84
91
Financials
Life & Health
Insurance
Amerisource
($27; ABC)
77
90
98
Health Care
Health Care
Distrib.
BMC Software
($36; BMC)
60
96
93
Technology
Systems
Software
CA ($22; CA)
85
88
85
Technology
Systems
Software
Cognizant Tech.
($46; CTSH)
37
99
94
Technology
IT Consulting
& Svcs.
Comcast
($15; CMCSa)
96
90
98
Cons. Discretion.
Broadcasting
CVS Caremark
($33; CVS)
89
87
83
Cons. Staples
Drug Retail
DirecTV
($31; DTV)
68
94
85
Cons. Discretion.
Broadcasting 
Dolby Labs
($52; DLB)
38
98
92
Technology
Electronic
Equipment 
General Mills
($69; GIS)
64
88
89
Cons. Staples
Packaged
Foods 
Hewitt Assoc.
($38; HEW)
79
91
84
Technology
Data
Processing 
Hospira ($49; HSP)
61
88
91
Health Care
Health Care
Equipment
IBM ($123; IBM)
83
95
95
Technology
Computer
Hardware
NII Holdings
($34; NIHD)
81
92
84
Telecom Svcs.
Wireless
Telecom
Oceaneering Int’l
($54; OII)
68
95
82
Energy
Oil & Gas
Equipment 
Transocean
($85; RIG)
97
90
87
Energy
Oil & Gas
Drilling
* Quadrix scores are percentile ranks, with 100 the best.

The Focus List is somewhat diversified, with representation from seven of the 10 market sectors, although technology now represents 38% of the portfolio. While we find many technology stocks attractive, the market has not been kind to the sector this year.

Consensus estimates project the S&P 1500 Technology Sector Index’s per-share profits rose 141% in the December quarter, taking into account the companies that have already declared earnings. Almost 75% of the 162 technology companies in the S&P 1500 that have declared December-quarter earnings topped the consensus. Yet the S&P 1500 Technology Sector Index is down 7.2% for the year, versus a decline of 4.0% for the broader index.


—–— Annual Return —–—
Year
Focus
List
(%)
S&P 500
Index
(%)
2003
20.2
26.4
2004
17.5
9.0
2005
8.1
3.0
2006
12.9
13.6
2007
22.8
3.5
2008
(48.8)
(38.5)
2009
40.0
23.5
2010
(2.3)
(4.0)
Since Jan. 1, 2003
48.3
21.7

Over the next year, we expect the market to recognize the earnings power of technology stocks in general, and our recommendations in particular. In the following paragraphs, we present two particularly attractive Focus List technology stocks.

BMC Software ($36; BMC), a maker of programs that improve the efficiency of corporate computing systems, scratched out 2% sales growth over the past year yet managed per-share-profit growth of more than 27%. With technology spending starting to recover, BMC says it is positioned to accelerate its top-line growth. Bookings, an indication of future sales, rose 18% in the December quarter. BMC is seeing more midsized deals between $500,000 and $1 million, lowering its reliance on the feast-or-famine nature of big contracts.

In the December quarter, BMC topped consensus estimates for both sales and profits. The company also raised its profit guidance for fiscal 2010 ending March, projecting 16% to 20% growth. At the end of December, BMC held cash of $1.21 billion, or $6.58 per share, enough to cover long-term debt three times over.

BMC shares have bounced since the earnings report, but the stock still trades at 18 times trailing earnings, versus the three-year average of 22. Based on Wall Street’s most conservative profit estimate for fiscal 2010 ending March, a return to the three-year average valuation would value the stock at $57. While such a move seems unlikely in the near term, we believe the shares can reach $45 this year. BMC Software is a Focus List Buy and a Long-Term Buy.


Since the early 1990s, IBM ($123; IBM) has transformed itself from a maker of computer hardware into a diversified provider of hardware, services, and software. The shift elevated operating margins, steadied sales, and partially insulated the stock from the recession, as services and software are not as cyclical as the hardware business.

IBM is poised to benefit from the rise of cloud computing, a process that delivers computing services over the Internet from remote data centers. Cloud computing treats software as a service rather than a product. IBM entered that market in April with the release of a suite of business-management software that users pay for every month. Since then, the company has opened 11 cloud-computing labs. In January, Panasonic ($15; PC) agreed to migrate the first 100,000 of an eventual 300,000 employees to IBM’s LotusLive, marking the largest cloud-computing venture yet. IBM sees cloud computing growing at a rate of 28% a year, blossoming into a $126 billion market by 2012.

Wall Street projects sales growth of 4% and per-share-profit growth of 11% for IBM this year, targets the company should be able to exceed. Given its bright outlook, IBM’s shares look appealing at 12 times trailing earnings, a 17% discount to the five-year average P/E ratio. With an Overall score of 95, IBM is a Focus List Buy and a Long-Term Buy.

10 STOCKS TO AVOID

We don’t advise shorting stocks, and we never assign sell ratings. But the A (above-average), B (average), and C (below-average) ratings we present with our Monitored List tell you a lot about what we think of a stock.

C-rated stocks have below-average potential, in our opinion. Such companies tend to earn low Quadrix® scores and face industry or company-specific problems with no easy solutions.

The table below lists 10 monitored stocks that earn C ratings. Do not purchase these stocks. And if you own them, consider upgrading into something better.

—— Quadrix Scores ——
Company
(Price; Ticker)
Value
Quality
Overall
Sector
Industry
Alcoa ($13; AA)
36
8
25
Materials
Aluminum
Anadarko Petro.
($64; APC)
14
31
27
Energy
Oil & Gas
Explor. & Prod.
Applied Mat’ls
($12; AMAT)
17
21
10
Technology
Semiconductor
Equip.
Bank of America
($14; BAC)
53
27
32
Financials
Banks
Bank of NY
Mellon ($27; BK)
50
11
21
Financials
Banks
Citigroup ($3; C)
27
19
14
Financials
Diversified Fin’l
Services
Devon Energy
($67; DVN)
22
17
9
Energy
Oil & Gas
Explor. & Prod.
Motorola
($7; MOT)
25
30
21
Technology
Telecom
Equipment
Nucor
($40; NUE)
26
24
4
Materials
Steel
Valero Energy
($18; VLO)
59
47
29
Energy
Oil & Gas
Refining & Mktg.
* Quadrix scores are percentile ranks, with 100 the best.

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