Over the last five years, the S&P 500 has rallied 62%, with consumer goods, services, healthcare and most sectors stretched in terms of valuation.
Meanwhile, big tech remains cheap relative to other industries of the market, despite major macro catalysts like the Internet of Things, big data, and the cloud continuing to drive double digit growth.
Given these catalysts, there are several big technology stocks, many of which have been beaten down, that now have tremendous short-term upside potential.
These are stocks that are trading at about half the earnings multiples of the S&P 500, stocks that could rise 50% next year and still be cheap.
And best of all, most of these big tech companies are also paying a hefty dividend. This gives investors even more bang for their buck in 2016.
Tech Stocks to Buy: Apple Inc. (AAPL)
Apple (AAPL) isn’t exactly a beaten-down tech stock, but with losses of 15% over the last six months, it is certainly well off its high.
Apple is expected to grow revenue 6% next year and earn $10.72 per share, both of which I think are too conservative. Therefore, AAPL stock is trading at about 10 times next year’s expected earnings. And if you remove its $206 billion in cash from the equation, then AAPL trades at a multiple of under seven!
That’s ridiculously cheap for the world’s most valuable tech company, a company that has consistently proven itself with higher demand year after year in hardware, software and services. As previously said, I think $10.72 is far too conservative, with iPhone sales performing better than expected and AAPL buying back loads of stock each and every quarter.
Nevertheless, AAPL has been quiet this year, but could very well rise 50%, to $165, and would still be cheap at just 16x and 10x earnings before and after cash, respectively.
Tech Stocks to Buy: Qualcomm (QCOM)
Qualcomm (QCOM) stock has been one of the worst performers of 2015, falling 34%. The company has faced a number of problems that range from lawsuits and a slowdown in China to losing Samsung‘s (SSNLF) Galaxy S series as a customer for its mobile chip technology.
While QCOM had previous said that revenue losses in the coming quarter could reach 20%, management recently said that its fiscal first quarter will be towards the high end of expectations. Furthermore, Qualcomm just recently agreed on a licensing agreement with Android handset maker Xiaomi, that should provide a bump next year.
Nevertheless, expectations for the coming year are very low, and QCOM should continue to benefit from a surge in connected devices (i.e. the IoT). With QCOM expected to earn $4.17 per share next year, it is trading at less than 12 times next year’s earnings.
That said, QCOM has certainly had its fair share of problems — that is undeniable. However, it is too cheap to ignore with a 4% dividend yield, and even if it surged 50%, QCOM would still trade at just 9x next year’s earnings minus cash.
Tech Stocks to Buy: International Business Machines (IBM)
International Business Machines (IBM) has had a rough three years, but all that could change in 2016.
IBM has very quietly positioned itself as a leader in both the IoT and cloud delivered-as-a-service. Individually, these businesses are almost meaningless compared to IBM’s broader business, but collectively, they carry far more weight.
The problem is that IBM combines the performance of these two businesses into larger segments that have underperformed. Looking ahead to 2016, IBM is creating new segments to showcase the performance of its growth businesses, which should go a long way in reversing sentiment.
With that said, IBM is not quite as cash-rich as its big-tech peers. However, it is just as cheap at just nine times earnings. Looking ahead, 2016 could very well be the year that IBM’s trend of revenue losses comes to an end.
When coupled with new segments to showcase high-double-digit growth, there’s a good chance that IBM stock goes much higher in 2016, possibly 50% higher.
Tech Stocks to Buy: Alibaba (BABA)
Alibaba (BABA) stock is well off its low, with gains of about 40% over the last three months. Yet despite this fact, BABA remains very cheap for a company that is expected to grow revenue 30% next year, and grow its profits even faster.
On a trailing-12-month basis, BABA has free cash flow of $8.1 billion, which means it trades at 26 times FCF. In comparison, the slower-growing Amazon.com (AMZN) trades at double that multiple at 58x FCF.
If BABA reaches the $11 billion in FCF that many expect over the next 12 months, it will trade at less than 19x FCF. In retrospect, the actual multiple to FCF is likely far lower due to BABA’s new-found emphasis on buying back stock. Nonetheless, that is far too cheap for a company that still has several years of 20%-plus growth ahead.
Even if BABA were to jump 50% next year, it would still trade at less than 40 times FCF, and likely even lower due to buybacks and accelerated FCF growth. This makes big gains for BABA highly likely.
Tech Stocks to Buy: Hewlett-Packard (HPQ)
Since Hewlett-Packard‘s (HPQ) separation into two companies, investors have been trying to determine which is best and what to expect moving forward. For HPQ, there’s nothing too exciting about its business — PCs and printers. However, it is a cash-rich business at a low valuation that pays a very solid 4.3% dividend yield.
Specifically, there are a lot of catalysts in place that should be very rewarding to shareholders in 2016. One is the company’s goal to reach $1 billion in savings, caused by lowering its cost structure. For the current fiscal years, HPQ is trading at roughly 7.2 times forward earnings, a multiple that I consider far too cheap given those cost savings and its high dividend.
Instead, an 11x earnings multiple would look far better on this much-improved version of Hewlett-Packard, a company that takes most of the combined entity’s free cash flow and a company that should remain somewhat consistent as declines in PCs begin to stabilize.
With that said, expect HPQ to look more like the gem of this breakup as the months progress for the reasons noted herein, and that should lead to bigger stock gains.
Tech Stocks to Buy: Western Digital (WDC)
It has been a particularly bad year for the disk drive storage giant Western Digital (WDC), whose stock losses have reached 45% in 2015. The big problem for WDC has been lower-than-expected demand for PCs and pricing weakness for both hard disk drives and solid state drives.
In the past, nearly all of WDC’s revenue was created from storage products sold in PCs, but over the last five years it has evolved to find new markets for revenue (storage for the cloud) where just one-third of its revenue comes from PCs. Nevertheless, WDC is merging with the NAND and solid-state drive flash giant SanDisk (SNDK).
This could become a huge catalyst in 2016, as SSDs become used in more than 40% of laptops in 2016, up from just 25% last year. The merger with SanDisk means that this movement from HDDs to SSDs for laptops won’t cause harm to WDC, as it benefits either way.
Still, the storage industry is very profitable, and after WDC’s big losses, it is now very cheap. The company is expected to earn $7.42 per share next year, which means it trades at just eight times next year’s earnings. Keep in mind, these estimates do not include the $5 billion in revenue and a near 15% operating margin that WDC will gain from SanDisk.
At the end of the day, WDC is cheap, even without SanDisk, and 50% upside should not be too hard for the stock to gain.
Tech Stocks to Buy: Seagate Technology (STX)
Seagate Technology (STX) and WDC are nearly identical companies, with STX controlling slightly more of the HDD market. The only difference is that STX has not purchased the equivalent of SanDisk, but has completed several acquisitions in flash storage and recently partnered with Micron (MU) to serve the same purpose.
However, STX’s leading presence with enterprise storage, the cloud and flash storage makes it a good investment moving forward, and its willingness to consistently be one of the most shareholder-friendly companies in technology sets it apart from WDC.
Not only does STX pay a dividend yield of 7.4%, but it has also spent nearly $1.8 billion over the last year in buybacks. Collectively, STX has reduced its shares outstanding by 34% over the last five years alone. That activity has caused its stock price to surge 135% over the five-year span, whereas its market capitalization has only increased 50%, thereby illustrating the effects of aggressive stock buybacks.
With that said, STX is a cash-rich company with more than $2 billion in FCF. With STX expected to earn $4.25 per share next year, it trades at just 8x next year’s earnings and only 5x FCF. Given its buybacks, dividends and the ongoing growth of storage in the cloud, STX could easily surge 50% and keep going higher.
As of this writing, Brian Nichols owned shares of STX, AAPL and BABA.