Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Robert Walberg will appear on NBR Tuesday (check local listings) to share his top stock picks for a resurgent tech sector in 2011.
Although the tech sector will have grown by more than twice the rate of the U.S. economy in 2010, tech stocks still lag the overall stock market. As of Tuesday, the sector is up by slightly more than 9% compared to a gain of 12.5% for the S&P 500. Weak revenue growth, relative softness in large-cap companies such as Cisco (CSCO) - Get Report, Microsoft (MSFT) - Get Report and Intel (INTC) - Get Report and lackluster IT (information technology) spending contributed to the group's disappointing performance.
However, as we look forward to 2011 the outlook for the sector is considerably brighter, and I expect techs to assume a leadership role in driving market performance.
There are four key factors behind our optimism for next year and they are:
- IT budgets increasing
- New product cycles resulting in real revenue growth
- Discounted valuations
- Mergers & Acquisitions
Based feedback from CEOs and industry conferences, we are convinced that with the economy stabilizing companies will begin to ramp up spending on IT. While growth will be modest -- about 6% -- it's the trend that counts, and the trend here is definitely on the rise.
Some of the upside will be muted from constrained spending by government bodies, but with U.S. corporations sitting on almost $2 trillion in cash some of that money is going to be invested in technology. Cloud, mobile, software and consulting will likely be the chief beneficiaries of any spending increase.
For the first time in years, the bottom-line growth we see in tech will be driven less by cost-cutting measures and more by actual top-line, or sales, growth. New product cycles in everything from networking to software, combined with the ability and need of companies to update their technology to maintain or enhance their competitiveness, positions the sector for real growth. Again we see tech growing at about twice the pace of domestic GDP in 2011.
While most stocks tied to the cloud -- such as
are trading at lofty valuations, much of the tech sector trades at a discount to growth. If we are correct and top-line growth returns on an increase in IT investment, the sector should enjoy material multiple expansion.
In the meantime, the tech sector is ripe for additional takeover activity given low interest rates, ample amounts of cash on corporate balance sheets and relatively attractive valuations. Mergers and acquisitions played a large role in underpinning tech shares in the latter half of 2010 and we expect that trend to continue at least through the first six months of next year.
Three stocks we see outperforming in 2011:
: Juniper has one of the strongest product cycle stories in the networking sector, which will lead to 18% plus revenue growth, 25% earnings growth and meaningful margin expansion into 2011. We also expect the company's slate of new and upgraded products to lead to market share gains against its larger rivals such as Cisco. Finally,
JNPR enjoys a strong balance sheet
with $5/share in cash, and at 24 times earnings, below its growth rate, there's plenty of room for upside. Our target is $46.
: Oracle recently beat earnings and revenue expectations and guided higher for fiscal 2011. Though the stock is trading near its highs, we believe there is plenty more upside given Oracle's strong product portfolio and momentum going into 2011.
The company is enjoying revenue growth from all regions of the world with respect to its database, applications and license segments. Oracle's Exadata product increased its pipeline to $2 billion from $1.9 billion. With a $30 billion market opportunity for this product alone, there is much to be excited about. Margins were also ahead of plan, with more upside to come as Mark Hurd makes his impression at the firm. The stock remains cheap, below its long-term average of 19 times earnings, and our target is $40.
: OmniVision is a leading designer and marketer of high-performance semiconductor image sensors. Its products are highly integrated sensors for mass-market consumer and commercial applications, including mobile phones, computer notebooks and Webcams, digital still and digital-video cameras, security and surveillance systems, entertainment devices, and automotive and medical imaging systems.
The company dominates its market, continues to enhance its product offerings and trades at a considerable discount to growth and the market. The recent price setback in these shares offers a compelling long-term entry opportunity for risk-tolerant, growth oriented investors. Our upside target is $40.
Robert Walberg is chief market strategist and editor of Premium Products at
. Prior to joining
, Walberg was founder and president of Chartwell Asset Management, a financial advisory company. Before founding Chartwell, he worked as a financial analyst and columnist for
from 2003 to 2008. Walberg was on the founding team at
from 1996 to 2003, working as chief equity analyst, formulating the company's near-, intermediate- and long-term market positions. He was regularly quoted by
The Wall Street Journal
Investor's Business Daily
and made guest appearances on
ABC World News
The Daily Show with Jon Stewart
. Walberg received a bachelor's degree in political science from the University of Illinois.