Written by Fastball
Published under Technology
December 27, 2012
Back in September, we announced another edition of 5 Tech Stocks for Fall, in this case 2012 of course. We did the same in 2011, beating the S&P 500 by a 4.6% margin over a 3-month period: our 5 stocks = 5.9%; S&P 500 = 1.3%.
For 2012, we again picked five tech stocks to beat the S&P 500 index over a three month period from 9/24/12 – 12/21/12. Let’s review how each of them performed, what’s ahead for each and how the group did as a whole compared to the S&P 500.
Accenture operates one of the largest technology, consulting and outsourcing operations in the world. Investors know this company for its consistency, low-volatility and steady dividend (currently 2.4%). It has a P/E under 17, a 31% gross profit margin and a sky-high 56% Return-on-Equity (ROE).
For our 3-month period, Accenture produced a 5.9% gain. Unfortunately, it was set to be the top gainer of our 5 stock group until it announced earnings last week. They reported a strong quarter, but it wasn’t enough to keep the stock up at its $70 level.
Accenture certainly isn’t the most sexy company to invest in, but it has given its investors terrific returns in recent history and a nice 2%+ dividend to carry them through any short-term dips. Accenture continues to be a good long-term story with great returns. It is a buy on any significant pull-back.
SalesForce.com provides customer relationship management (CRM) software through the “cloud”. They have also incorporated a focus on social connectivity within the CRM. Much hated and much loved, Salesforce.com can be a tough stock to invest in. You have to be able to stomach some volatility with this stock. But the patient investors have been rewarded time and again.
How does a company with no profit and a sky-high P/E ratio command such a price? Simple: it’s all about the cash flow. More specifically, operating cash flow. While the GAAP profit is not there, SalesForce.com still makes money from operations. The profits aren’t there mostly because much of the revenue gets deferred and they have consciously invested whatever profits they would have made into Sales & Marketing costs to make sure they are grabbing as much market share as possible while the market opportunity is there. Investors are counting on the company being able to obtain a dominant position in the market, whereby they will be able to make big profits on contract renewals, since those future years will carry significantly less costs.
For our 3-month period, Salesforce.com produced a 10.3% gain. We continue to like the long-term story here, but realize that you can always wait for a dip in this stock before buying.
Rackspace provides cloud computing services for all sizes of corporations. It is at the heart of the “cloud” expansion. As a result, it stands to benefit tremendously from the drastic and rapid shift to cloud computing. With its OpenStack product, it hopes to become the standard open source solution in the industry.
Like many other fast-growing technology companies, Rackspace stock has a premium price. It has a P/E of 98 and a Price-to-Sales of 7.7. With a P/E of almost twice its growth rate, Rackspace should be bought on pullbacks instead of chasing it higher.
As you can see from the chart above, its had a nice run higher recently. In fact, Rackspace produced a 10.7% gain over 3-month period. It continues to grow revenue and earnings at a rapid pace, but it is tough to buy the stock right now after its big run. You’ll likely get a pull back to buy at a better time.
F5 Networks (FFIV)
F5 provides solutions that optimize and secure networks. In their words: “With F5 solutions in place, businesses gain strategic points of control wherever information is exchanged, from client devices and the network to application servers, data storage, and everything in between.”
Much like Rackspace, F5 Networks is trying to gain a dominant position in their space. Thusfar, they seem on the right track, showing signs of strengthening even though Citrix and Cisco seem to teaming up against F5 in this battle.
F5 stock got hit after its most recent earnings report and guidance, which was a little softer than investors were expecting. Still, F5 continues to grow cash flows, while trading at a high but not unreasonable P/E of 30. It has recovered most of its post-earnings drop, but unfortunately logged an 8.2% loss in our 3-month period. If F5 can succeed in gaining a leading position in network security and optimization, then its current P/E of 30 will look silly low in the not too distant future. Investing in F5 clearly has plenty of risks from competition, but also can provide a huge reward to any long-term portfolio if they succeed.
Baidu is the dominant search engine in China, generally considered the “Google” of China despite not quite having the technological capabilities of Google. Much of its dominance came from being an early entrant in the market and from Google not really being allowed to play ball in China. It’s been able to hold its dominant position thus far, but is facing increased competition from within China.
The chart above illustrates well the conflict that investors are having with Baidu’s stock. On one hand, it holds a dominant position in Chinese search, has continued to grow revenues at a rapid pace and has a tremendous return on equity (even through that trend is declining). On the other hand, investors are worried that Baidu won’t hold-up to the increased competition. Perhaps it will become the next Yahoo instead of Google. Yahoo once held a dominant position from being a good early entrant until competition from Google took over.
With a Price-to-Earnings-to-Growth (PEG) ratio of 0.36, the risks seem to be priced into the stock already. Baidu’s market share and revenue growth would have to take a huge hit to justify such a low valuation compared to its growth rate.
Baidu produced a 9.8% loss for our 3-month period. With its current valuation, Baidu is a good stock to buy, especially if you think that China will rebound from its recent period of “slow” growth.
In total, our five stocks produced an average return of 0.4% versus the S&P 500′s 1.4% loss..and that loss even includes the dividend that the SPY index paid on December 21st. Overall this 1.8% outperformance is pretty darn good for a 3-month period, even if it didn’t match last year’s 4.6% outperformance. Below is a chart that shows how each stock did compared to the SPY index.
Thanks for reading! We’ll put out another 5 Tech Stock list next fall.
Disclosure: Dave currently owns shares of BIDU and FFIV.