NEW YORK (TheStreet) -- Investors like to bet on tech companies. The potential for market-beating growth is huge -- if you buy the right ones.
Morgan Stanley (MS) analysts identified "high-quality companies likely to strengthen and extend a sustainable competitive advantage, resulting in a "30 for 2018" list. The analysts put forth their best investment ideas "in their sectors at times of market dislocations or uncertainty." The stocks are considered suitable for holding for a three-year time period, according to the report, issued Thursday.
"Our driving principle was to create a list of companies whose business models and market positions would be increasingly differentiated by 2016," the report said.
Morgan Stanley's top investment ideas for tech industry are names that, for the most part, investors have heard before. But they're worth checking out anyway.
"The main criterion is sustainability -- of competitive advantage, business model, pricing power, cost efficiency, and growth. We selected the companies that scored best on these criteria," the report said. The analysts also took into account capital structure, shareholder remuneration, as well as environmental, social and governance principles, which can "shed light on a management team's approach to sustainable and responsible governance over the very long term."
When you're done be sure to check out the investment bank's consumer sector investment ideas. We paired Morgan Stanley's views with ratings from TheStreet Ratings for comparison.
TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Note: Year-to-date returns are based on May 18, 2015 closing prices.APH data by YCharts
1. Amphenol Corp. (APH)
Market Cap: $18 billion
Year-to-date return: 8.1%
Morgan Stanley Rating/Price Target: Equal weight/$58 PT
Morgan Stanley said: We view Amphenol as a premier franchise in the connector space with superior revenue growth and strong track record. Connectors represent a $50 billion market and grow at 2x GDP. More so, the industry is characterized by benign pricing and low capital intensity, leading to attractive FCF and returns. Despite being top-heavy with top 10 companies representing 60% share, the connector market remains fragmented with hundreds of regional companies that operate in niche markets and lack geographical presence or resources to scale. This provides many opportunities for larger companies such as Amphenol to gain share through M&A. Amphenol has more than doubled its market share over the last 10 years to 9% and the combination of strong organic growth and meaningful M&A activity has led to a 13% CAGR over the 2004-14 period, nearly 3x the market's growth rate. Further, the company has entered the larger and faster growing $70 billion sensor market, through its acquisition of GE's Advanced Sensors business. We expect Amphenol to make further acquisitions as well as invest organically in sensors, which should help sustain its above-average growth.
TheStreet Ratings: Buy, A-
TheStreet Ratings said: "We rate AMPHENOL CORP (APH) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, notable return on equity, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- APH's revenue growth has slightly outpaced the industry average of 0.1%. Since the same quarter one year prior, revenues slightly increased by 6.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- AMPHENOL CORP has improved earnings per share by 16.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, AMPHENOL CORP increased its bottom line by earning $2.22 versus $1.96 in the prior year. This year, the market expects an improvement in earnings ($2.45 versus $2.22).
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Electronic Equipment, Instruments & Components industry and the overall market, AMPHENOL CORP's return on equity significantly exceeds that of both the industry average and the S&P 500.
- 35.02% is the gross profit margin for AMPHENOL CORP which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 13.54% is above that of the industry average.
- APH's debt-to-equity ratio of 0.94 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 2.64 is very high and demonstrates very strong liquidity.
- You can view the full analysis from the report here: APH Ratings Report