Top-Drawer Tech Picks

05/02/2017 2:50 am EST

Focus: TECHNOLOGY

Richard Moroney

Editor, Dow Theory Forecasts

Expectations of tax cuts, regulatory reform, and increased infrastructure spending have propelled stocks since the November 8th election, with technology names near the front of the pack, notes Richard Moroney, editor of Upside.

To be sure, some good news already appears reflected in tech-stock valuations. Based on medians, tech stocks trade at 25.5 times trailing earnings, up from 23.4 a year ago and above the 20-year norm of 24.6. The P/E drops to 23 using estimated current-year earnings.

Still, we’re finding attractively valued tech names with strong profit-growth prospects. Here are three that we consider top-drawer tech picks.

Advanced Energy Industries (AEIS) is a major player in the fast-growing — and highly cyclical — market for power-conversion components.

Its products are used mostly by semiconductor-equipment makers. Applied Materials (AMAT) accounted for 35% of sales in 2016, while Lam Research (LRCX) represented 21%.

Advanced Energy is benefiting from increased demand for OLED (organic light-emitting diode) displays used in mobile devices. The stock earns a 90 for Quadrix Overall, paced by a 99 in Momentum.

Advanced Energy is projected to grow per-share earnings 17% this year on 18% higher revenue. Over the last 12 months, shares have generated a 92% total return, outpacing more than 93% of tech stocks in the S&P 1500.

That rally pushed its Value score down to 31, though shares remain reasonably valued based on estimated P/E. At 18 times projected current-year earnings, the stock trades 21% below the median for technology stocks. Advanced Energy is being upgraded to Best Buy.

Cirrus Logic (CRUS), a leading maker of integrated circuits used in smartphones, tablets, and digital headsets, specializes in audio components.

Exposure to Apple (AAPL), which accounted for 85% of sales in the latest quarter, represents a major risk. But bright near-term growth prospects and strong Quadrix scores, including a 99 Overall, bode well for Cirrus. The company boasts fat profit margins and accelerating free cash flow.

Cirrus has rebounded 10% since tumbling on Feb. 2, when it said March-quarter sales would be $300 million to $340 million — below the consensus of $334 million at the time.

Nevertheless, Cirrus enjoys strong operating momentum. In the December quarter, per-share earnings more than doubled; sales jumped 50%; and cash flow surged 83%.

For fiscal 2017 ending March, the consensus calls for 81% higher per-share profits on 29% revenue growth. Per-share earnings are expected to climb 4% in fiscal 2018 — a low hurdle considering recent growth. Cirrus is being upgraded to Best Buy.

The boom in “smart” home technology has put Control4 (CTRL) in the sweet spot. The company’s products help control and automate lighting, audio, security, and heating and cooling. Its software and gear are compatible with more than 10,000 devices, including Amazon Alexa, the popular voice service.

The home-automation market is potentially huge — and largely untapped. Since opening its doors in 2003, Control4 has automated more than 276,000 homes and businesses.

Since February 9th, when Control4 posted better-than-expected results for the December quarter and encouraging guidance, shares have jumped 33%.

Yet the stock trades at 16 times estimated current-year, versus 25 for peers in the S&P 1500 Index. Per-share earnings are expected to climb 10% this year and 13% in 2018. Sales should advance at least 10% both years.

Over the next five years, analysts project per-share profits will climb 20% annually. Control4 was upgraded to Best Buy.

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