Apple seems to be one of those rare companies and stocks that come around once in a generation, whose fundamental metrics more than justify the stock’s performance. Intel was that stock in the 1990s.
So I’m curious: Which stock is next? Are there other tech companies that have even better metrics than Apple and could be up-and-comers?
To find these stocks, I selected two key metrics on which I place a high degree of importance when evaluating a stock from a fundamental perspective: return on equity and gross margins. The companies I found have ROE greater than Apple’s 45.6 per cent and gross margins greater than Apple’s 44.7 per cent.
Here are six tech stocks that rate better than Apple.
Gartner is an investment technology research, advisory and consulting company. Established in 1979, the company has grown along with the greatest technological boom in history. Gartner’s research analysts not only help their end user clientele but also have an impact on Wall Street as an independent research provider.
Revenue for the company grows in the low double-digit percentages, but given Gartner’s business model as a service provider, its high gross margin rate converts revenue growth into even higher earnings growth. Earnings per share are expected to rise at a percentage rate in the mid-20s in 2012 and 2013.
With the stock selling at 25 times current year’s earnings and a PEG ratio of just 1.06, Gartner makes for a compelling investment.
Linear Technologies is a specialized semiconductor company that produces analog integrated circuitry for a wide range of end users in industries such as telecommunications, networking, computers and factory automation. Revenue for the fiscal year ended June 2011 rose 27 per cent.
The company is making a strategic decision to reduce its exposure to the consumer and cell-phone markets as those customers are becoming less reliant on analog-based technology and increasing exposure to the more rapidly growing industries in the global economy such as industrial, automotive, communication infrastructure and military. While this strategy may yield some short-term consequences, in the long term, the company will benefit. The market has already priced these decisions into the company’s stock price.
In addition, Linear Technology pays an above-market-average dividend of 3 per cent.
Linear Technology was also featured recently in “ 8 Stocks Rising on Monster Volume.”
IBM , known by many on Wall Street by its nickname “Big Blue,” was regarded by the last two generations as a computer hardware company. It made money for investors for decades by manufacturing hardware and software for large mainframe computers.
Then, in the 1980s, IBM pioneered the personal computer. Its big mistake was focusing on the hardware and allowing Microsoft to engineer and control the operating system. Now IBM is focused entirely on information technology consulting, systems integration and software.
The stock is trading at an all-time high and is the largest constituent stock in the Dow Jones Industrial Average. However, given that IBM is a service business, it is able to leverage low single-digit sales growth with its high gross margins into low double-digit percentage earnings growth.
IBM shows up on recent lists of 10 Longest-Held Stocks of Top-Rated Mutual Funds and 18 Stocks That Will Outlive the Hype.
Baidu , often referred to as the Google of China, is the largest Chinese-language search engine in the world. Despite a slowing of the economy in China to a low rate of growth, Baidu is attracting more users and clients at a fast pace.
This fast-growing company is expected to increase revenues by 59 per cent in 2012 and 42 per cent in 2013. Earnings are expected to grow 53 per cent in 2012 and 41 per cent in 2013. Earnings surpassed analysts’ estimates for each of the last four quarters.
The company has a virtual monopoly in China as Google has its share of operating and legal woes in that nation. The stock is trading 10 per cent below its 52-week high, likely due to the China slowdown concerns. However, I believe that Baidu will eclipse that high of $165.96 on its way to $200.
Baidu is one of SAC Capital’s holdings and also shows up in George Soros’ portrfolio as of the most recently reported period.
Cirrus Logic is a fabless semiconductor company that specializes in analog and mixed-signal integrated circuits. Applications for Cirrus Logic’s products span audio, industrial and energy end users. The audio technologies are used in MP3 players, smartphones, laptops and tablets. All of these are growing markets.
Revenue is expected to grow about 15 per cent for the fiscal year ended March 2012 and then 12 per cent in the following year. Earnings are expected to increase nearly 19 per cent in the next year. The company carries no debt and has cash and short term investments of about $3.20 per share . Some people have speculated that Apple could use some of its cash to buy this $1.65-billion company. Whether or not that will happens remains to be seen, but the speculation alone indicates that there is unlocked value in shares of Cirrus Logic.
Cirrus shows up on a list of 10 Small-Cap Stocks Poised to Rise.
Medidata Solutions develops and deploys technological solution used in the clinical trial process and supply trial management by pharmaceutical, biotechnology and medical device companies. Revenue is expected to grow by 15 per cent in 2012 and 13 per cent in 2013.
The company earned $1.60 on a GAAP basis and $1.51 on a non-GAAP basis in 2011, which included a litigation settlement of $6.3-million and a tax benefit of about $19.0-million. When I factor out those special items and apply a normalized tax rate of 40 per cent, the company earned about 40 cents per share in 2011.
Analysts expect MDSO to earn $1.12 in 2012 and in $1.42 in 2013. When I look forward to the company’s normalized earnings, the stock has ample growth to warrant a PE of around 25 to 30 times earnings.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site; and, publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.