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Stock Market 2008 – Information Technology Sector
Despite the recent turmoil in the IT sector for 2008, I would argue that it is now where you want to be. The thinking here is that the financial sector is struggling to hide its bad news, the real estate market is in shambles, and even retailers are struggling to maintain growth. The move to technology seems to make perfect sense given the typically strong international exposure, safe balance sheets and the fact that IT stocks have a historically low correlation with the broader markets. Let’s pick some tech bulls.
Consumer Electronics – The Net Fool Picks Apple (NYSE: AAPL ) Hey Mr. Market, why do you look down on Apple so badly? The iPod business has completely matured. The iPhone is losing inventory to similar devices. MacWorld lacked the usual superstar perspective. I’ll tell you something, take this news and know that Apple has historically done its best when the mood is low. Steve Jobs & Co. is my favorite IT pick for 2008. The downside has opened the stock value and I feel they hit rock bottom!
Looking further into the troubling issues. The iPhone sold less because of Apple’s push into the new iPod Touch, analysts at Needham noted that “Apple would have sold close to four million iPhones without it.” Add this to the fact that an estimated 25%-30% of iPhones are “unlocked” by AT&T, a number that actually benefits AAPL through carrier headaches. Although iPod sales have slowed, I believe the mp3 player is still in its infancy transitional phase, and interesting possibilities are now opening up in mobile technology.
I feel that AAPL could be a recession proof. The Mac business is healthier than ever and is making up for iPod losses on its own. Investors punish top companies like Apple for any disappointments. The stock is 35% off its highs, trades at a premium of 24x earnings compared to 32x its peers, and has a PEG of 0.7x. They have free cash flow that we like ($6.78 per share, 2008 estimate), and the business segments have never looked healthier. People hate this company for no reason. As Warren Buffet says, “Be fearful when others are greedy, and greedy only when others are fearful.”
Communication 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 TVs coming out every day. The results of the fourth quarter showed that management thinks the same due to continued investment in facilities and strong relationships with market leaders. The prospects for 2008 were VERY positive and new revenue streams should be found in the estimated 60%+ growth in LCD capital spending. GLW anticipates issuing a new one flexible fiberglass material and should see appreciation from the upcoming adoption of mandatory diesel filtration. There is no great catalyst driving growth, which is definitely odd, but the attractive valuation covers most of the risk.
Outside of LCD glass, Corning still leads the PC. A new “Gorilla Glass” product that allowed access to touchscreens began to be sold to mobile phone manufacturers. Corning seems to understand the transition to mobile technology and is really hitting it. With that in mind, Standard and Poors added: “Sales accelerated to 17% growth in 2008, up from 13% in 2007, helped by currency benefits and more importantly, higher demand for liquid crystal display glass substrates (LCD) for TV and computer manufacturers.” Everything is in store for Corning, even Verizon is on board, a new customer of GLW’s “ClearCurve” cable solutions. ClearCurve is the most bendable fiber in the world, 100 times more bendable than regular fiber… which is obviously very important. This new technology could unlock enormous potential with the support of industry leaders at FiOS.
Corning should be a key technology holding for any investor. They are still cheap with a PEG of 0.83x and a forward PE of 13x against an estimated trading value of closer to 20x. There are some risks posed by excess capacity in the LCD glass industry and potentially slowed IT spending. However, I feel retailers will continue to buy glass for bigger screens and fiber for faster internet. If they have too much inventory and can’t sell, that’s their problem… not Cornings. These guys beat the money on a dime, and their prospects have only gotten better. They are bulls all around and deserve premium trading 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 that the time has come he apologized to powerful winners such as First Solar. ThinkEquity Partners labeled this great stock with one word, “debottlenecking.” After smashing earnings estimates of 53 cents a share with a stunning 77 cents gain, they rose 30% a day after raising 2008 guidance. Do not allow this buy-athon scare you. We thought the preparation of the solar industry was over and apparently we were wrong. From year to year 280% revenue growth and EPS strength suggests greater future earnings power.
Operational efficiency is one of the primary benefits I see from operating in 2008. Costs per watt ($1.12) averaged down 6% year-over-year, and the negative impact of the euro on currency was almost entirely overshadowed by economical operation in First Solar factories in Malaysia. Areas for improvement have been identified and most analysts feel they can bring home the gold. First and foremost, the first and second quarters of 2008 should show continued growth on track with appreciation in 2007. All solar companies trade at attractive premiums when it comes to growth. With oil rising, it appears to be a boost for green energy want stay strong. Investors should return to the solar arena with strong earnings and demand in mind.
The reconstruction of the Malaysian plant could have a negative impact on First Solar’s earnings in the first quarter of 2008. On the other side of the coin, we expect production to increase and see operating margins to remain at 30%+. It wouldn’t surprise me at all to see more good news in the guidance. We expect their PE and PEG ratios to be more in line with the industry, as the current premium they appear to be trading at is the result of explosive growth over the past year. The enforcement was unerring in 2007, and with only green lights so far… First Solar is making great long-term growth.
Infrastructure Tech. – The Net Fool picks Akamai (NYSE: AKAM ) Akamai is alive and well in 2008. After being considered earlier in 2007, they have continued to show strength in their industry. In a recessionary market, there is little certainty around an Internet company. It’s there VERY a huge demand for entertainment and media on the Internet, and Akamai is just a company that delivers the goods. AKAM posted a big jump in profits during the fourth quarter, beating analysts’ estimates. After increasing guidance in 2008 with the constant demand for streaming media online, it becomes difficult to turn this company negatively.
Akamai Technologies has had incredible success over the years. Once again frustrating the bears at their latest earnings conference call, AKAM got a boost from its 52-week lows. They have now extended their streak of consecutive revenue and profit growth to 20 consecutive quarters! Moreover, their balance sheet is as healthy as ever; they again increased free cash flow to $634 million from $566 million. With a leading role in the thriving content delivery market, analysts like Canaccord Adams suggest potential revenue and earnings growth “in surplus of 30% the next few years.”
Analysts often dispute Akamai’s assessment of whether they are cheap or in-line. I believe they are cheaper given that they are about 45% off their 52-week high and trading at a PEG of 0.7x. I may be tempted to test the waters if they drop below $32. They trade at a slight premium in terms of price/earnings, but I think this is more than deserved as they appear to be a reliable recession holding in information technology. With price sensitivity expected to disappear along with the reduction in bandwidth costs, Akamai looks set to rule the market for the next few years.
That’s it for information technology. There are certainly some great stocks to be found in that sector, despite the notion that technology is always more volatile and dangerous than financial companies, conglomerates and the like. While February is historically a bad season for IT, I wouldn’t mind doing my March shopping a little early with a lot of negative sentiment unfairly dragging down perfectly healthy companies.
– Network fool
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