01/27/2006 12:00 am EST
Joe Battipaglia, saw his top pick last year—Western Digital—rise 84% in 2005; remaining strong, the stock is now up 115%. He still sees information technology and equipment as a primary growth driver in 2006 and chooses two new tech plays as his current favorites.
"While challenges exist on the horizon so too do opportunities for upside surprises. At present, we believe that the positives outweigh the negatives for the US economy and prospects can improve quickly in ’06— particularly if we get some relief early in the year on the question of energy prices and if the Fed stops raising interest rates. Corporate spending on information technology and equipment has grown at double-digit growth rates for the past two years as the embedded capital base, including technology, ages. For investors who correctly anticipate the coming changes, there are ample opportunities for well-allocated and diversified portfolios.
"Our top speculative pick for 2006 is PALM, Inc. ( PALM NASDAQ). This maker of hand held computing devices has transitioned its product line to compete directly with RIMM's Blackberry. Teaming up with Microsoft and initially offered on Verizon's network, we believe PALM will achieve widening margins on higher volumes in '06 and '07. The stock currently trades at approximately 1 times revenues and 8 times free cash flow making it an attractive speculative pick. We note that we own this stock in our Washington Crossing managed accounts and have a $40 price target.
"Our more conservative favorite for the year ahead is Microsoft Corp. ( MSFT NASDAQ). Following the successful X-Box introduction comes Microsoft's real bread winner: new operating system software. Vista, the brand name for the new software, should be a multi-year adoption cycle for both corporate and personal use. Both revenue growth and margins should see improvements as Microsoft puts on a big marketing push. Microsoft’s huge cash hoard can easily accommodate such marketing expenses along with further increases to the dividend. The stock currently trades at a market multiple and is set, in my opinion, to have a breakout year in 2006. We also own this stock in our Washington Crossing managed accounts and have a $32 price target."