One of the key goals in tech investing is to focus on dominant
companies that sport attractive valuations. There's even an acronym
for it: GARP (growth at a reasonable price). Yet how you
define this approach can get tricky. Should you focus on stocks
that have extremely low valuations, with perhaps only modest growth
prospects? Should you focus on companies that are sporting sizzling
growth and robust -- but not ridiculously rich -- valuations? Or
should you try to focus on companies with a mix of solid growth
prospects and mid-range valuations?
If you can't decide, then don't worry. I've found three tech
stocks that land into each camp and, if taken together, then they
may give you the perfect GARP positioning.
1. Polycom (Nasdaq: PLCM): Cheap and unloved
This maker of video and audio-conferencing equipment has stalled
out after a solid growth spurt, which saw sales rise more than 150%
to $1.5 billion between 2005 and 2011. The global economic crisis
has led enterprises to hold off on new equipment purchases that
aren't seen as vital to ongoing operations. As a result, sales are
expected to drop 5% this year and rebound only modestly in
Yet a flat top line is masking an important change that will
affect the company'sbottom line . Polycom is rolling out new
products that focus on high-margin software and away from
low-margin hardware. As a result, althoughearnings are likely to be
stuck at around 70 cents a share in 2012 and 2013 as the product
transition takes hold, they are expected to riseback up to around
90 cents a share in 2014, thanks to expandingprofit margins.
Investors initially applauded these new product plans, but those
gains have already evaporated in this toughmarket .
Until Polycom's profit picture strengthens, investors can focus
on the company's $630 million net cash balance, which accounts for
a hefty 39% of the entiremarket value of the company.
2. Broadcom (Nasdaq: BRCM): Good growth and value
This chipmaker seems to be right at the heart of many major tech
trends. Its communications chips will be found in a myriad of new
devices that will support the next iteration of Wi-Fi, known as
802.11ac. Its systems-on-a-chip approach is enabling smartphone
makers to pack a lot of functions into just one semiconductor chip,
allowing them to produce smaller smartphones. And the next
generation of TV sets will have improved Web-streaming
capabilities, with many of them sporting Broadcom chips. Broadcom
chips can already found in many of
Apple's (Nasdaq: AAPL)
best-selling products -- the iPhone and iPad.
But investors also note that until the globaleconomy
strengthens, spending on consumer devices may be a bit tepid.
Moreover, Broadcom must compete heavily on price, so even as sales
are expected to rise in the high single-digits in 2012 and 2013,
earnings will likely be stuck around $2.90 per share in 2012 and
Yet the long-term growth trajectory remains quite bright for
Broadcom: The company has hiked spending on research and
development efforts this year to more than $2 billion, which should
help Broadcom stay on the leading edge as we move into the middle
of the decade.
Shares look like a good deal at around 10 times projected 2012
3. Fusion IO (
): Scorching growth and healthy valuations
I profiled this fast-growing data-storage supplier in May, and
though shares subsequently rallied, they've been sucked back down
by this tough market.
The growth trajectory I mentioned then remains intact. Sales are
expected to rise around 50% in fiscal (June) 2013 to about $530
million, and hit $800 million by fiscal 2015, according to Goldman
As I noted before, Fusion IO had cultivated strong relationships
with companies like Apple,
and others. Now you can add more names to the list: "Partnerships
Cisco (Nasdaq: CSCO)
NetApp (Nasdaq: NTAP)
are still in the early Oct. 25, stages, [and] they could become
more significant contributors in the second half of thefiscal year
," note Goldman's analysts.
It's hard tocall this a value play, though the forward
price-to-salesmultiple has fallen from about six to around four in
recent weeks. For a company that has long been rumored to be on the
sales block, the recent sharp pullback in shares will surely
heighten suchspeculation .
Risks to Consider:
These companies may deliver tepid near-term growth as the
fiscal cliff crimps discretionary spending.
Action to Take -->
Looking past the possible near-term trough, these three tech
companies are still very well-positioned for growth as we head into
the middle of the decade. And their slumping share prices can be
seen as solid entry points for the patient investor.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CSCO in one or more of its "real money" portfolios.
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