Three Favorites in Techs

12/06/2016 8:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Tech stocks look especially attractive based on timely indicators, such as operating momentum, earnings estimate revisions, and share price action, asserts Richard Moroney, editor of Dow Theory Forecasts.

Shares of some of the largest technology companies have struggled in the weeks since the election. Donald Trump’s immigration policies, tariffs or other disruptions in global trade could hurt companies that conduct a large percentage of their business overseas.

At the same time, Trump has hinted about a tax holiday that would let companies repatriate overseas cash, potentially boosting dividends and stock buybacks.

As we’ve seen with the Brexit and U.S. election this year, trying to handicap how political events play out is often a fool’s errand. We prefer to focus on the underlying operating strength and valuation of individual stocks.

Below, we review three of our favorite picks in the technology sector:

Alphabet (GOOGL)

The shares have slipped 4% since the election; yet analyst-revision trends remain upbeat, with the consensus profit estimate for 2017 rising to $40.89 per share, implying 19% growth.

President-elect Trump has suggested he may take an antitrust stance against large tech companies, and his trade policies may also hurt their ability to expand in foreign markets.

But a possible tax holiday could be a big positive for Alphabet, which ended the September quarter with 60% of its $83.1 billion in cash overseas.

CDW (CDW)

The company saw its per-share profits rise 17% in the first nine months of 2016, while revenue grew 10%, cash from operations 69%, and free cash flow 87%.

It announced a 49% hike to its quarterly dividend in November, as it seeks to reach a payout rate of 30% of free cash flow by 2019; CDW’s current payout ratio is roughly 16%.

The shares have rallied 15% since the election and are now up 22% for 2016. Despite that rally, the stock trades at 16 times trailing earnings, a 20% discount to its three-year average and 25% below the median S&P 1500 technology stock.

Encouragingly, analyst profit estimates for 2017 have risen in the past 30 days, with the current consensus projecting 8% profit growth. CDW is a Focus List Buy and a Long-Term Buy.

VMware (VMW)

The firm develops data-center products that help clients improve efficiency. More than 50% of its revenue comes from software maintenance.

This has been contributing to steady growth — sales have risen at least 5% in 28 consecutive quarters.

Free cash flow jumped 54% to $2.24 billion for the 12 months ended September. The balance sheet brims with net cash of $6.75 billion, or nearly $16 per share, up 18% from a year ago.

The stock earns an Overall score of 98 (out of a potential quantitative ranking of 100), and both sector-specific ranks exceed 98.

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By Richard Moroney, Editor of Dow Theory Forecasts

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