This is no time to be complacent. The continued spread of coronavirus, which shut down the Mobile World Congress trade show this week, promises continued disruption of the global markets, and the Asia-based supply chain, of tech companies.
So why are investors bidding up the most expensive tech stocks to new heights? Microsoft (MSFT) - Get Report, for example, is up 16% this year, while Twilio (TWLO) - Get Report, a young cloud computing darling with a very pricey stock, is up 31%. And Tesla (TSLA) - Get Report has seen a whopping 93% gain. These stocks are now firmly over-bought.
Meanwhile, coronavirus keeps expanding as a world health concern. Nature magazine reports this week that the virus is “likely” to spread to more cities inside and outside China, based on scientists' analysis of mobile phone data and airline traffic patterns.
Given that risk, and given the big gains in Microsoft and others, investors should hedge their bets with less outsized winners. TheStreet has identified five stocks worth considering: Veeva Systems (VEEV) - Get Report, Applied Materials (AMAT) - Get Report, KLA Tencor (KLAC) - Get Report, Qualcomm (QCOM) - Get Report, and VMware (VMW) - Get Report. They're all excellent businesses, and they may shine as investors move out of the priciest names, especially if tech trends go south.
1. Veeva Systems
Up about 11% this year, Veeva, a maker of cloud computing software for the life sciences, has seen as much increase as Apple (AAPL) - Get Report. However, Veeva has trailed the other cloud darlings such as Twilio. Unlike Twilio and other cloud stocks, such as Okta (OKTA) - Get Report and MongoDB (MDB) - Get Report, Veeva is profitable, with 34% profit-per-share growth expected for the fiscal year that ended last month (Veeva will report fourth-quarter results on March 3). It’s trading at 62 times next year’s earnings, which is pricey but not unusual for a fast-growing company given stock valuations overall these days. While no company is going to be immune from issues that hit the tech industry broadly, it is conceivable that Veeva may benefit slightly from selling to large drug development companies. Those customers need its software to manage their multi-year development pipelines, regardless of what happens with markets at the moment. Last year, Veeva shares appreciated 57%.
2. Applied Materials
Applied is the largest semiconductor equipment vendor in the world, with tools for chip makers to make their chips. There was not a speck of concern in the company’s report on Tuesday of fiscal Q1 results. After a weaker semiconductor cycle in 2019, Applied saw its first revenue increase in four quarters, and beat both sales and profit expectations. The company’s outlook is also comfortably ahead of consensus. Any breakdown in the supply chain in Asia in coming months is going to have an effect on sales of Applied’s equipment. But for the moment, the whole chip industry’s bounce back from doldrums last year is making for a better 2020. With a 12% return thus far this year, Applied is still one of the cheapest tech stocks around, especially for a company with a giant franchise. It fetches just 15 times next year’s projected earnings per share.
3. KLA Tencor
At $28 billion in market capitalization, KLA Tencor is a smaller competitor to Applied. Like Applied, its topped expectations when it reported fiscal Q2 results on Feb. 4, but it didn’t see the same big next-day pop as Applied. The stock is flat so far this year. KLA is perhaps a more balanced mixture of growth plus income for tech investors, given that it is expected to deliver higher revenue growth this year than its larger competitor, 27% versus 17%, and it also has a higher dividend yield, at 1.9% versus 1.2% for Applied. But the two stocks have a similar valuation, with KLA just slightly more costly at 16 times next year’s projected earnings.
It’s not a surprise that smartphone chip vendor Qualcomm, up just 2.5% this year, is seriously lagging the S&P. TheStreet has been saying for some time now that newer 5G wireless networks will take longer to be built out than expected, which can tend to crimp demand for new handsets, and for Qualcomm’s chips. But 5G will happen eventually, and Qualcomm has a valuable patent portfolio. Now is the time, while Qualcomm’s valuation is low, at 15 times next year’s profit per share, to consider the stock, before estimates eventually rise.
Of the group, VMware is perhaps the riskiest name. The enterprise software maker doesn’t have a cyclical business like Applied and and KLA, nor does it have raging growth like that of Veeva’s or the huge new market to look forward to like Qualcomm has with 5G. All that makes it fairly dull in comparison, and it’s not a total surprise it has lagged the S&P this year, rising just 4.5%. But VMware always meets or exceeds quarterly numbers, and even if its 13% project annual revenue growth is not scintillating, VMware is nevertheless a solid company. With a forward P/E of 22 times next year’s estimate, VMware is an attractive alternative to pricier names such as Twilio should investors rotate from growth to value later this year.
With any luck, these five will play out like a similar group TheStreet identified in late November. Four names in that feature -- Arista Networks (ANET) - Get Report, Twitter (TWTR) - Get Report, Netflix (NFLX) - Get Report, and Nokia (NOK ADR) -- have seen gains ranging from 21% to 29% since the article, versus the 9% return of the S&P. The only laggard is chip maker Xilinx (XLNX) - Get Report, down 8%, mostly because of the delay of 5G wireless spending.
In good times, and in troubling times, the rule applies that buying low and selling high matters, providing one can identify excellent companies with businesses that endure.