5 Investment Ideas From Wall Street: Jan. 23

NEW YORK ( TheStreet) -- Investors have a lot of moving parts to keep an eye on with the continuation of earnings season this week. Here are five investment strategies for Monday that Wall Street insiders are touting.

1) Software is more resilient than you think

Evercore says that IBM ( IBM) might be a signal that the software sector has more life in it than investors think.

"IBM noted that demand trends remain strong as enterprises look to deploy solutions that can add value to their businesses, and we expect initiatives around business intelligence, data integration and cloud computing to remain key focuses throughout the software industry," writes Evercore.

IBM met expectations on revenue and slightly beat earnings estimates in the fourth quarter last week. IBM's push toward more business analytics and other complex businesses where it doesn't have to compete on price seems to be paying off. The firm's projected earnings of $14.85 a share for 2012 topped Thomson Reuters' forecast of $14.82.

Some of the stocks Evercore favors are VMWare ( VMW), Citrix Systems ( CTXS), Salesforce.com ( CRM) and RedHat ( RHT) -- the latter two being Evercore's top two growth ideas for the current year.

2) Watch what happens if Sears continues to struggle

JP Morgan says the persistent sales struggles at Sears Holdings ( SHLD) may provide a lift to other retail stocks. Less than a month ago, Sears said it would close up to 120 stores.

Investors should figure out how to position themselves in the appliance and consumer electronics space if Sears goes through with the store closings and liquidates. Top appliance retailers by sales in 2010 were Sears, Lowe's ( LOW), Home Depot ( HD) and Best Buy ( BBY). Meanwhile, the top consumer electronics retailers were Best Buy, Wal-Mart ( WMT) and Apple ( AAPL).

JP Morgan says that Gregg Appliances ( HGG) and Best Buy ( BBY) are among firms that would benefit if Sears continued to suffer. The firm also recommends Lowe's, Home Depot and Wal-Mart.

However, this might leave your head scratching: Sears' stock has been surging in recent weeks. On Friday, shares jumped 14%, putting the company's year-to-date gains at more than 50%. The run up may be due to speculation that Eddie Lampert, the majority owner, may take the company private and on news reports that CIT Group has begun to approve financings for Sears' vendors.

3) Google is still a buy

Google ( GOOG) is still a darling stock after the company's earning miss last week. Google's fourth quarters earnings were more than $1 per share lower than analysts' forecast, leading shares to plummet by more than 8% on Friday. However, some analysts attributed the miss to factors like a hit to the top line from foreign-exchange translations and said that the advertising business is still strong.

"Despite the slowdown in search, we remind investors that paid click volume is showing its fastest acceleration in years, display and mobile traction growth is continuing at a 2x growth run-rate, and Google correctly seems to be focusing on fewer, more promising franchises," writes Evercore Partners. The firm targets a $760 price for Google, which implies that the company can trade at 12.3x and 20.5x EBITDA and earnings per share estimates.

"Fundamental growth in revenues and operating profit dollars remains robust, driven by search & display ad gains, and decent opex controls," writes Deutsche Bank, which said it would add positions. "The stock trades at 14.5 times 2012 earnings per share vs. 17% operating profit growth in 2012," it added. The firm notes that investors should watch whether Google's ad changes in the latter half of 2011 will translate into higher ad budgets allocated to Google in the current year.

"We believe that the 9% stock price decline post close is an over-reaction to actually a decent quarter, buried under a lot of noise," write Jefferies. "We'd be buyers on the dip."

Nevertheless, some on Wall Street questioned whether the stock would stall in 2011 given a slower macro economy. Scott Devitt, analyst at Morgan Stanley cut his price target to $590 from $642 a share and says he sees "few near-term catalysts."

4) Leverage opportunity in paper and packaging

A warning last week from packaging material maker MeadWestvaco ( MWV) didn't stop JP Morgan from writing that the paper and packaging sector is still worth a look.

"Valuation looks less expensive and earnings could be better than feared," writes JP Morgan, which recommends buying stocks in the sector this quarter.

MeadWestvaco said that it saw lower volumes and production last quarter. CEO John Luke said that the company "saw more aggressive inventory management than we had anticipated by some customers in response to ongoing macro developments, particularly in Europe." Analysts expect the company to report a pre-tax income of $150 million to $160 million in the fourth quarter and cash flow of $550 million for the full year on Wednesday.

Following MeadWestvaco's warning, peer company Sonoco Products ( SON) cut its fourth quarter profit outlook, citing weak demand in North America and Europe. Sonoco cut its expected fourth quarter adjusted earnings to a range of 45 to 47 cents a share, down from the prior range of 59 to 63 cents a share.

Despite this, JP Morgan says "leverage the market's forgiveness." Among stocks in the sector the firm recommends are Crown Holdings ( CCK) and Graphic Packaging ( GPK). "We would avoid stocks where expectations appear higher based on recent quarterly results, which includes International Paper ( IP) and Rock-Tenn ( RKT)," it adds.

For the paper sector, the firm's earnings estimates are actually below the consensus for the fourth quarter and 2012. "We continue to forecast steady prices through 2012 as we think tepid demand and a still soft economic backdrop could prevent producers from successfully implementing price increases," it says. However input costs could ease in the first quarter compared to the last, as lower gas prices offset higher chemical prices for producers.

The firm acknowledges that it downwardly revised on earnings as the economic climate got tough in the third quarter of 2011. But, it says: "We think most of the Street lowered their forecasts and as economic indicators point towards stabilization, estimates have started to flatten out."

5) Expect further underperformance from communication stocks

Telecom companies have been underperforming the market so far in 2012, and analyst say the trend could very well continue. The sector will be a key one to watch this week with Verizon ( VZ) reporting earnings on Tuesday and AT&T ( T) on Thursday

"We expect a bifurcated quarter with cloud services and well positioned infrastructure companies showing strong results and communication companies weakfish earnings and guidance," writes Timothy Horan, analyst with Oppenheimer. "For the quarter we expect the large telecom companies to show record smartphone sales, which have the negative effect of weakening margins."

The firm notes that cloud service providers and tower stocks tend to outperform during earnings season, highlighting Comcast ( CMCSA), American Tower ( AMT) and RigNet ( RNET) as stocks offering decent growth.

Oppenheimer warns that large telecom firms may provide lower guidance for 2012 than expected, due to factors like a peak in smartphone subsidies this year and a weak economy. Record smartphone sales may pressure margins.

"We are mostly raising estimates for a cloud services companies ( American Tower Corporations ( AMT), Equinix ( EQIX), Rackspace Hosting ( RAX)) and lower them for communications-focused companies ( Alaska Communications Systems Group ( ALSK), MetroPCS ( PCS), Verizon ( VZ))," it says.

-- Written by Chao Deng in New York.

>To contact the writer of this article, click here: Chao Deng.

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