The Top Tech Stocks for 2013

by David Eller

January is here and predictions for the coming year are rampant.

There are so many great cutting-edge technology companies and hopes for the next 12 months that it’s easy to lose your discipline and let greed take over.

I’d love to spend the next 500 words talking about companies like Tesla (Nasdaq: TSLA) and Facebook (Nasdaq: FB) and Google (Nasdaq: GOOG). But we’re at a triple top on the S&P. And even if companies meet their earnings expectations, companies with high valuations can drop as investors become more conservative.

As we’ve detailed in the past, a company’s share price is made up of the book value (or liquidation value) plus earnings potential. Even if the balance sheet is healthy and the company meets current earnings estimates, your $80 stock could become a $60 stock overnight if the expectation for future growth slows.

Since stocks like Facebook have few net assets and low (if any) current earnings, the expectations for future earnings have a huge impact on the share price. Here at Investment U, we prefer to follow tangible earnings growth rather than speculation. So for today’s forecast I looked through more established companies, with real assets, and at least one stable earnings stream in addition to a good case for growth. In short, if the growth story doesn’t work out as quickly as Wall Street expects, you won’t end up holding an empty bag.

After diligent research, I see the following four tech companies as standouts for safe outperformance in 2013:

  • Intel (Nasdaq: INTC) has been left for dead. Semiconductor investors have been focusing on wireless and low-power rather than PC suppliers. That shouldn’t be a surprise since PC makers had a very tough 2012. The corporate PC refresh cycle was extended due to the weak economy. Tablets were becoming mainstream. Dell (Nasdaq: DELL) and HP (NYSE: HPQ) continued to disappoint. Intel tried to get into mobile computing, but the Ultrabook isn’t effectively competing with the iPad. However, the corporate computing market isn’t going away. Expectations are low, the stock is cheap… and with a 5% dividend, you are being nicely paid to wait for earnings to improve. The CEO transition will bring an increased focus on mobile, which will hopefully increase the number of design wins for Intel’s low-power Medfield product line.

  • Apple (Nasdaq: AAPL) is loved by its customer base, but it remains a hardware company. After being disappointed by Dell and HP throughout 2012, professional investors have not been willing to acknowledge that Apple may be different, and that traditional hardware margin compression may not be in store for Apple. The fact is that Apple is selling a closed ecosystem of products, not commodity products that interact with third-party hardware. This is similar to IBM’s early days, but with one major difference: Apple provides a better user experience for its customers. Estimates as well as expectations have come down over the last two quarters, and Apple is now trading at less than 10x out year earnings. The company merely needs to execute on its current product line to meet estimates and see a dramatic increase in share price. If it executes on a revised Apple TV product or builds out a Netflix-like, on-demand content offering, these new revenue streams would dramatically increase Apple’s earnings potential. It seems strange but a combination of execution and new product offerings at a time when expectations (and valuation) are low could drive 50% upside to its existing massive valuation.

  • Synchronoss (Nasdaq: SNCR) may be the most widely used company that you’ve never heard of. It provides an activation platform for mobile services and recently expanded into cloud computing through its recent acquisition of NewBay. As an activation vendor, Synchronoss has a relatively stable and boring business that is likely to grow through tablet adoption. However, carriers are attempting to increase their service offerings and NewBay provides the infrastructure to allow the carriers to do it. Synchronoss has the relationships and NewBay has the infrastructure. The date marking the beginning of the recent run in the share price was the date of the company's presentation at the Credit Suisse conference, November 28. Professional investors have been building positions, but the game is still in early innings.

  • Teradata (NYSE: TDC) is a “big data” management vendor. All of the little bits of information that insurance companies and social media vendors collect and use needs to be correlated, stored and used to predict future behavior. This may mean you’ll get more direct mail and unwanted sales calls, but at least you can profit from this trend in the market. Teradata is the most highly recommended vendor by Gartner group. It’s positioned in Gartner charts in “the upper right” quadrant for being the best executor, as well as the best innovator. The stock pulled back in the second half of 2012 due to weakness in U.S. business, but revenue and profits held up in Europe. Why? When the economy is difficult, companies scrutinize their books more heavily. There are two bright spots for Teradata. First, it’s a rapidly growing business in Asia where, as a spinout of NCR, Teradata has a unique competitive advantage. Also, a unified appliance (called Aster) will allow Teradata to offer a cheaper, “out of the box” solution. Sure, you can buy a solution from SAP (NYSE: SAP) or Oracle (Nasdaq: ORCL). But if you want to connect multiple vendors together, a third party can be more appealing.

Each of these companies has an established underlying business in a rapidly growing sector of technology.

They may not sound as sexy as a Tesla but, in my opinion, each will likely outperform the overall market in 2013, without the concerns of drawdown similar to Groupon (Nasdaq: GRPN).

Good Investing,

David Eller

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