Jubak's Journal
Recent articles:
• The stealth stock-market rally, 10/26/2004
• As scandal shakes insurers, steer clear, 10/22/2004
• 5 companies pumped up by oil prices, 10/20/2004
More...
| | Jubak's Journal
5 stocks for a post-election tech rally
Concern about the election is holding stocks back. But barring a worst-case scenario in the election, the market could climb, with tech stocks leading the way.
By Jim Jubak
Who needs the bookies of Las Vegas or the Iowa presidential futures markets to bet on the presidential election when youve got the stock market?
Of course, there's one tiny difference. In Las Vegas or Iowa, people are betting on the odds of a Bush or Kerry victory. In the stock market, investors are wagering on the odds of whether there will be a decision on Election Day.
The stock market is stuck in a narrow trading range on fears that the voting on Nov. 2 wont settle anything. Wall Street worries that we're in for a replay of 2000, the year of the hanging chad, in spades. Imagine, if you can, the confusion in Florida multiplied by Ohio, Nevada, Wisconsin, and Florida (again), with 15,000 lawyers arguing even before the last vote is cast.
In 2000, the Standard & Poors 500 fell by 5% from the market close on Nov. 6 through Dec. 13, the day following the Supreme Courts ruling in George Bush's favor. Wall Street wonders whether the decline could be worse this time.
But where theres fear, theres opportunity for investors gutsy, or foolish, enough to bet on something less traumatic than an election thrown into the courts or, even worse, the House of Representatives. The savvy oddsmaker knows that likelihood of that worst-case scenario is relatively low, and that makes the bet attractive.
So how do you bet on the possibility that the market will rally if we dodge the worst-case bullet? Technology is the sector that looks like its chomping at the bit, ready to take off as soon as the election is decided.
Finding direction
The signs?
The technology-laden Nasdaq Composite has outperformed the Dow Jones Industrial Average by six percentage points -- plus 1% to minus 5% -- since Sept. 10. Stocks like EMC (EMC, news, msgs), Hutchinson Technology (HTCH, news, msgs) and Radware (RDWR, news, msgs) are showing improving relative strength. And analysts are jockeying to upgrade the same technology stocks that they downgraded not so many weeks ago.
On Monday, for example, Smith Barney upgraded 15 semiconductor stocks, including Texas Instruments (TXN, news, msgs), Analog Devices (ADI, news, msgs) and Altera (ALTR, news, msgs). You dont have to look too hard to find the logic behind those upgrades: Institutional investors on Oct. 31 fiscal years are finished with their year-end tax selling. Those same investors are holding piles of cash and don't have to report on their portfolios to investors for months. Add these two together and Wall Street is counting on a wave of year-end buying and repositioning as money managers try to justify annual performance bonuses. Where better to look for a quick pop than in the beaten-down technology sector?
In my Wednesday appearance on CNBCs "Morning Call" I recommended three technology stocks for investors who want to bet on a post-election rally.
What fuels a growth stock
Hutchinson Technology shows that nothing gets a growth stock running like a little, make that a lot of, growth.
On Oct. 10, the company said it expects to report earnings of 15 to 20 cents a share on sales of $122 million for the fiscal fourth quarter that ended Sept. 26. In late July, the company had projected it would break even or earn up to 10 cents a share on $110 million to $110 million in revenue.
Average weekly shipments of the suspension assemblies and components that Hutchinson makes for disk drives jumped by 50% from the beginning of the quarter to the end, the company said. More importantly for any investor looking to buy the stock here, Hutchinson is projecting that unit sales this quarter will grow to 160 million to 175 million units, up from the 150 million projected for the September quarter. That, and what I expect will be good news when the company reports results Nov. 1, ought to keep analysts' earnings estimates climbing. For the December quarter theyve climbed to 35 cents from 25 cents in the last month.
The stock still trades more than 15% below its 52-week high and at a trailing 12-month price-to-earnings ratio of just 11.8. Recent momentum is strong, with the stocks relative strength, a measure of its performance against all other stocks, rising to 98 in the last three months. Our StockScouter rated Hutchinson a 10 out of a possible 10 on Oct. 27.
Following Google
Radware makes the software and hardware tools that make it possible for Web sites to switch applications on the fly with maximum efficiency and maximum security. So its no wonder that Radware has taken off along with the stocks like Yahoo! (YHOO, news, msgs), Google (GOOG, news, msgs) and eBay (EBAY, news, msgs) that are the front end of the e-commerce world.
The stocks relative strength has climbed to 94 in the last three months.
Radwares revenues and earnings are on the rebound from a disastrous 2002 for the information technology sector when the company lost 13 cents a share. On Monday the company reported third-quarter earnings of 19 cents a share, up 138% from a year earlier. Revenue climbed 25%.
Analysts see fourth-quarter earnings per share growth of 60% and another 40% in the first quarter. Investors should expect a lot of volatility out of this stock because its market capitalization is just $400 million. Volatility is a good in a rally but bad if the market tumbles. Our StockScouter rated Radware an 8 on Oct. 27.
Climbing out
NCR (NCR, news, msgs) has slowly crawled out of the hole that its former parent AT&T (T, news, msgs) dug when it spun off the company in 1995. Years of cost-cutting and a transition from commodity hardware products to software and services pushed free cash flow up to $282 million in 2003 from a negative $1 million in 2001. The company still carries the burden of AT&T-era pension costs, estimated by Standard & Poors at $140 million for 2004.
But the company also has a major share of two hot technology sectors. Its financial self-service business is one of the biggest providers of ATMs and the software that integrates them with their mother banks. And its data warehousing business collects and massages data for Internet e-merchants. Earnings per share are projected to grow by 123% this year and another 48% in 2005. That should give the stock plenty of momentum in any year-end rally. Our StockScouter rated NCR an 8 on Oct. 27.
And as always, here are two exclusive picks for CNBC.com on MSN readers. Both have the kind of earnings and technical momentum that investors should own entering a year-end. Both, however, also have fundamental stories that make them good buys well into the second half of 2005.
A comeback
EMC is back. The company, one of the leaders of the technology sector in the heady days before the bubble broke in 2000, has spent the good part of three tough years cutting costs, shoring up product lines and continuing a shift to software from hardware as a driver of company profitability.
EMC's approach seems to be working, thanks in good part to a recovery in technology spending. Total storage software industry revenue is likely to grow by 17% this year, according to IDC. EMC, the sector leader with about 33% of industry revenue, is projected to grow its storage software revenue by almost 31% this year. Overall company revenue should climb about 29% in 2004 and 18% in 2005, according to Standard & Poors. Just as significantly, gross margins, a post-2000 problem for the company, are growing again.
Wall Street projects earnings per share growth of 75% this year and 38% in 2005. All of this, plus a turn in sector sentiment, explains why the stock's relative strength has climbed to 79 in the last three months from 71 for the last 6 months and 26 for the last 12 months. Our StockScouter rated EMC a 10 on Oct. 27.
Spinning off profits
Avaya (AV, news, msgs) is another AT&T spin-off -- by way of a 2000 spin-off from Lucent (LU, news, msgs), itself an AT&T spin-off -- that has turned the corner.
The company is now the major competitor to Cisco (CSCO, news, msgs) in the market for equipment to route phone calls over the Internet. Avaya has about 26% of that market, about the same as Cisco, according to Synergy Research Group. The market is growing by 30% to 40% a year.
On Tuesday the company reported fiscal fourth-quarter earnings of 21 cents a share, 3 cents better than a year earlier. Revenue climbed 11%. For fiscal 2004, Avaya earned 63 cents a share, the first year it has been profitable since its spin off. Fiscal 2005 looks even better, with margins set to expand by a full percentage point, according to Standard & Poors, as the company continues to shift its product mix toward software. Wall Street projects earnings per share growth of 68% in fiscal 2005.
The stock now at a trailing 12-month price-to-earnings ratio of 22 and recently was almost 40% below its 52-week high. Our StockScouter rated Avaya a 5 on Oct. 27.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
|
