MKM Partners' 3 Contrarian Tech Stock Picks to Buy Before June

NEW YORK (TheStreet) -- June has historically been one of the weakest months for equities. Stock selection -- both buying and selling -- will be critical in the short term.

The stock market in June has averaged a 1.32% decline over the past 10 years, Jonathan Krinsky, the chief market technician at MKM Partners, wrote in a technical strategy report published Tuesday. Meanwhile, July has bounced back, averaging a 1.68% gain, he said.

"June will be here quickly, and it has been by far the worst month for stocks over the last 10 years," Krinsky wrote. "Therefore, some weakness into early summer would not be surprising, but in our view that would set-up a buying opportunity in July,"

"We think this market continues to be two steps forward one step back, where stock selection is more important than market direction," Krinsky added.

The report highlights 40 contrarian stock ideas by screening the Russell 3000 to find 30 stocks that have less than 25% analyst buy ratings, but have bullish charts. The report also highlights 10 stocks that have over 75% analyst buy ratings but have bearish charts.

The buy screen included three tech sector stocks. Below, TheStreet paired those stocks with ratings from TheStreet Ratings. And when you're done be sure to check out which health care stocks MKM Partner's says to sell before June.

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 26, 2015 closing prices.

 

ADP Chart ADP data by YCharts

1. Automatic Data Processing Inc.  (ADP)
Sub-industry: Data Processing & Outsourced Services
Market Cap: $40.1 billion
Year-to-date return: 3.6%
Automatic Data Processing, Inc., together with its subsidiaries, provides technology-based outsourcing solutions to employers worldwide. The company operates through Employer Services and Professional Employer Organization (PEO) Services segments.

TheStreet Ratings: Buy, A+
TheStreet Ratings said: "We rate AUTOMATIC DATA PROCESSING (ADP) 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, solid stock price performance, reasonable valuation levels, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 22.5%. Since the same quarter one year prior, revenues slightly increased by 7.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 27.73% over the past year, a rise that has exceeded that of the S&P 500 Index. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
  • 46.64% is the gross profit margin for AUTOMATIC DATA PROCESSING which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 16.14% is above that of the industry average.
  • Net operating cash flow has increased to $857.10 million or 15.21% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -11.75%.

 

 

CA Chart CA data by YCharts

2. CA, Inc. (CA)
Sub-industry: Systems Software
Market Cap: $13.6 billion
Year-to-date return: 1%
CA, Inc. provides information technology (IT) management software and solutions that help organizations plan, develop, manage, and secure applications and IT infrastructure in the United States and internationally.

TheStreet Ratings: Buy, B+
TheStreet Ratings said: "We rate CA INC (CA) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its increase in stock price during the past year, increase in net income, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and expanding profit margins. We feel its strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Software industry. The net income increased by 41.1% when compared to the same quarter one year prior, rising from $107.00 million to $151.00 million.
  • CA's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.18, which illustrates the ability to avoid short-term cash problems.
  • The gross profit margin for CA INC is currently very high, coming in at 84.75%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 14.76% trails the industry average.

 

 

EPIQ Chart EPIQ data by YCharts

3. Epiq Systems Inc. (EPIQ)
Sub-industry: Application Software
Market Cap: $625.6 million
Year-to-date return: -1.7%

Epiq Systems, Inc. provides integrated technology solutions for the legal profession in the United States and internationally. It operates in two segments, Technology, and Bankruptcy and Settlement Administration.

TheStreet Ratings: Buy, B-
TheStreet Ratings said: "We rate EPIQ SYSTEMS INC (EPIQ) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its increase in net income, good cash flow from operations, expanding profit margins, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Software industry. The net income increased by 175.4% when compared to the same quarter one year prior, rising from -$2.30 million to $1.73 million.
  • Net operating cash flow has significantly increased by 560.16% to $3.82 million when compared to the same quarter last year. In addition, EPIQ SYSTEMS INC has also vastly surpassed the industry average cash flow growth rate of -16.85%.
  • 48.30% is the gross profit margin for EPIQ SYSTEMS INC which we consider to be strong. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, EPIQ's net profit margin of 1.45% significantly trails the industry average.
  • EPIQ's debt-to-equity ratio of 0.96 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 2.91 is very high and demonstrates very strong liquidity.
  • Powered by its strong earnings growth of 171.42% and other important driving factors, this stock has surged by 41.87% over the past year, outperforming the rise in the S&P 500 Index during the same period. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.

 

 

 

 

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