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DECEMBER NEWSLETTER 7
It is no secret that there is an ongoing, raging bull market taking place, and not just in 2017. The business climate is getting back to having the best pro-business feeling in years. Including dividends for total return calculations, the Dow Jones Industrial Average is up over 23% and the S&P 500 is up over 18% so far in 2017. The Nasdaq 100 is up even more with a gain of about 30.5%, and that is even after some of its top technology constituents have seen handy pullbacks. As 2017 is coming to a close, investors are wondering how they should be making their investment stance for 2018 and beyond.
Most Wall Street strategists are calling for continued but more muted gains in the S&P 500 in 2018. Some are even projecting a gain of 10% or more including dividends. With tech stocks outperforming the broad market, the two most beloved tech stocks are Apple Inc. (NASDAQ: AAPL) and Amazon.com Inc. (NASDAQ: AMZN). But what about the rest of the market? There are 29 other Dow stocks outside of Apple, and when you consider Apple and Amazon together there are 98 other Nasdaq 100 stocks and 498 other S&P 500 stocks that investors can consider. Surely some of those other companies, even in technology, could have a real shot of outperforming Apple and Amazon in 2018.
24/7 Wall St. has screened through the universe of large cap technology stocks to see if there are other stocks that are expected to outperform Apple and Amazon over the next 12 months. Survey says: There are some tech stocks that are candidates to outperform Apple and Amazon! We must warn that analysts on Wall Street tend to keep rolling a 12-month price target on a stock rather than a year-end price target, so the formal view of December 11 may look different from what is expected to be seen in January.
Many analysts and traders alike go into hibernation mode in the final 10 to 15 days of December. With 2017 having been so strong, they are unlikely to try to push the envelope and take big risks ahead of the end of the year. Analysts on Wall Street frequently “refresh” their price targets higher or lower after the first days of each new year. That means this list of potential large-cap tech outperformers could be marginally different or quite different if various scenarios come into play in the next 20 days to 30 days.
Looking at analyst targets from Thomson Reuters and using certain other valuation metrics, 24/7 Wall St. has identified 10 large cap technology stocks that could outperform Apple and Amazon in 2018. What makes 2018 so challenging for an outlook is that the technology sector performed incredibly well in 2017, with Apple up 46% and Amazon up 55% so far in 2017. Many of these companies that could outperform in 2018 also had strong gains in 2017.
Analysts have a consensus upside for Apple of about 12.3%, if you include its dividend, calling for its shares to rise to $187.75. And Apple has a market cap of $875 billion, meaning that if things get any better for Apple (and if it doesn’t buy back too much stock) it could become the first $1 trillion value. Amazon has a $560 billion market cap now, and the consensus analyst price target of about $1,258 would imply upside of about 8.3% ahead.
Some analysts of course have higher price targets and are calling for more upside on each, but the reality is that if you average these two out at about 10%, then the reality is that Apple and Amazon combined are expected to rise about 10% into late 2018 — just a tad more than the expected gain in the S&P 500. It is also important for investors to consider that analysts issuing new and reiterated Buy and Outperform ratings in Dow and S&P 500 stocks tend to shoot for upside of about 8% at this stage of the greatest bull market in a generation.
To qualify as a technology stock that should outperform in 2018, several characteristics had to be present. Obviously the consensus analyst ratings and price targets had to be positive. The market cap target was generally at or above $10 billion, and there had to be strong trading volume and interest by Wall Street. The companies also still had to be seeing earnings and revenue growth. Certain stocks have pulled back from their highs considerably, so we tried to screen out stocks that might see analysts significantly “right-size” their expectations to something that might be less upside than expected for Apple and Amazon.
Here are 10 large cap and active technology stocks that are currently expected to rise more than Apple and Amazon over the coming 12 months.
AMD: Back to Profits, and Maybe M&A
Advanced Micro Devices Inc. (NASDAQ: AMD) shares have gained exponentially over the past two years, but it has also pulled back by one-third as the stock got ahead of itself above analyst targets. The years of 2018 and 2019 are expected to return to real earnings, with double-digit revenue growth. The consensus target price of $14.30 implies upside of more than 40% from the recent $10 share price, but Jefferies has kept its price target up at $19.AMD’s stock got ahead of itself when it went over $15 in 2017, so considering the pullback and considering that many analysts will probably “right-size” their expectations, AMD could still rise more than 25% in 2018, even if some price targets come down, and it remains a name that comes up in conversations around potential chip M&A targets. A spotty operating history and its market cap of almost $10 billion might limit some of the scope and interest for some investors. Still, AMD is winning in graphics and artificial intelligence, it has a new partnership with Intel and it can even be considered a cryptocurrency mining winner.
AMD has a 52-week trading range of $9.42 to $15.65 and a market capitalization of $9.7 billion. Its shares were down 12.4% so far in 2017, since its pullback has been so strong
Alibaba: The E-commerce and Cyber Leader in Asia
Alibaba Group Holding Ltd. (NYSE: BABA) runs the largest retail marketplaces and leading B2B sites throughout Asia. Hedge funds under Dan Loeb also have been buyers of late. Alibaba has been migrating from an e-commerce and online sales platform into a conglomerate of businesses with logistics, finance, data and cross-border infrastructure. Analysts expect big compounded growth to continue in its markets, along with mobile app growth.
Trading at $177.62, Alibaba has a consensus price target of $208.53, which implies upside of over 17%. Alibaba’s price target has been steadily rising. That consensus target was closer to $195 in mid-October, before its earnings report. And some analysts see much better upside, with Susquehanna’s $220 target price implying upside of almost 24%.
Shares of Alibaba have a 52-week range of $86.01 to $191.75. The market cap is $459 billion. Its shares were up 102.3% so far in 2017.
Alphabet: Still Google … and Still Going Strong
Alphabet Inc. (NASDAQ: GOOGL) has been seen at $1,049 in its most recent trading. The company the rest of us know as Google has grown and grown, with its own technology offerings, mobile phones, YouTube and about 100 other efforts. The company also seeks to be a leader in autonomous driving systems ahead. Some investors may still be hoping for a dividend.
With shares trading at $1,049, the $1,178 consensus price target implies upside of more than 12% in the coming 12 months. That may not be massively higher on the surface, but Evercore ISI still sees 17% upside to $1,230 and Credit Suisse sees over 28% upside to its $1,350 price target. Alphabet’s consensus price target also has risen from $1,100 in mid-October.
Alphabet has traded in a 52-week range of $789.62 to $1,080.00, and it has a market cap of $723.2 billion. Its shares were up 32.4% so far in 2017.
Applied Materials: Giving the Chipmakers What They Want and Need
Applied Materials Inc. (NASDAQ: AMAT) is effectively the leader when it comes to selling chip-makers equipment and software to assist in their ever more modernized chip designs. They have been growing and growing with an expected floor of 10% earnings growth expected. Trading at $51.25, Applied Materials shares have pulled back about 15% from their high, but the consensus analyst price target of $68.00 would imply that Applied Materials shares could rise more than 32% in the coming 12 months.
That consensus target was just under $60 as recently as mid-November. Citigroup sees Applied Materials shares worth as much as $70, and Merrill Lynch now sees its shares worth $80.
Applied Materials has a 52-week range of $31.66 to $60.89. The market cap is $54.8 billion, and its shares were up 59.4% so far in 2017.
Broadcom: Set to Grow, With or Without Qualcomm
Broadcom Ltd. (NASDAQ: AVGO) has seen its shares grow and grow. What’s left of the Avago-Broadcom merger now has Qualcomm shares in its M&A sights, and the company is relocating its headquarters back to the United States. Broadcom is growing rapidly on its own, with organic growth expected to continue in 2018 and later years. If it somehow manages to win in its ambitious Qualcomm buyout, Broadcom could become the biggest chip-maker in the world.
The $312.43 consensus analyst target implies upside of 20% from the recent $260 share price. And Broadcom also pays better than a 2% dividend yield to add to total return expectations. Unfortunately, until the Qualcomm issue is resolved it could weigh on the company — and if it loses then who might Broadcom target next?
Broadcom has a 52-week range of $173.31 to $285.68 and a market cap of $112.7 billion.
Facebook: Kicking You Know What on Mobile Usage
Facebook Inc. (NASDAQ: FB) is now effectively the unchallenged leader in social media. And if it lags or isn’t leading in competition, it simply copies and mirrors the other products and services of others. Facebook is expected to have secular growth, and it has proven that mobile can be a winning space for at least some companies over the desktop.
Facebook recently traded at $179.00, and the consensus target price of $208.21 still implies upside of 16.3%. Facebook’s consensus target price is also up from $196 in mid-October, before earnings. Evercore ISI sees upside of over 25% to its $225 price target.
The 52-week trading range is $114.77 to $184.25, and Facebook’s market cap is $521.9 billion. The stock was up 55.6% so far in 2017.
Lam Research: Pullback May Be a Gift
Lam Research Corp. (NASDAQ: LRCX) had more than doubled this year alone, but a recent post-earnings pullback has given investors room to look at getting back in the stock. The maker of chip processing equipment used in making integrated circuits has seen its shares retreat by about 15%. At $185 a share most recently, Lam Research has a consensus target price of $229 that still implies upside of over 23%. The stock had a consensus target price of $193 back in mid-October. Merrill Lynch recently kept a much higher $270 price objective.
Lam Research has a 52-week range of $103.01 to $219.70. The market cap is $30.0 billion. Shares were up 76.4% year to date.
Micron: Dirt Cheap Valuations in DRAM and NAND
Micron Technology Inc. (NASDAQ: MU) is the leader in DRAM and has been rapidly expanding in NAND. Its shares more than doubled over 2017, but they also have pulled back about 15% from recent highs. With a consensus price target of $53.86, the implied upside is more than 24% from the recent share price of $43.25. The consensus target price also has risen, up from $48.95 in mid-October and from $43.50 in mid-September.
Susquehanna recently set a $60 price target, which would imply upside of nearly 40% for Micron if the firm is right in being so aggressive. Micron’s growth is expected to continue in 2018, but a mixed outlook for 2019 keeps valuations low at way under 10 times expected earnings. Still, the risk here is that investors never want to give Micron a high valuation multiple on earnings, and some analysts have warned that chip growth is seeing supply catch back up to demand.
Micron has traded between $19.49 and $49.89 a share in the past year, and it has a market cap of $49.4 billion. The stock was up 97.1% so far in 2017.24/7 Wall St.
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Salesforce: Riding the Marc Benioff Tide to Infinity
Salesforce.com Inc. (NYSE: CRM) has grown in its CRM software and app solutions for businesses. It is also getting deeper into cloud and data operations and collaboration efforts. And now investors “only” have to pay about 75 times expected earnings, rather than its forward price-to-earnings ratio of 100 that they used to have to pay. Revenue growth is expected to remain above 20%, and operating earnings are expected to remain close to 30% here. Despite more than a 5% pullback after earnings, the reality is that Salesforce shares have held up much better than some tech peers during the November and December tech-exit rotational trading.
With a share price of $103.50 and a consensus analyst target price of $121.76, analysts are calling for upside in Salesforce of almost 18%. UBS is even more aggressive with a $135 price target, and Morgan Stanley sees upside to $127 here.
Salesforce has a market cap of $75.3 billion and a 52-week range of $68.23 to $109.19. Its shares were up 51.1% so far in 2017.
Skyworks: Many Solid Growth Target Markets Ahead
Skyworks Solutions Inc. (NASDAQ: SWKS) has seen a sharp pullback of almost 20% from its recent highs. Still, the maker of complex chips for electronics, aerospace, communications, the Internet of Things and many more applications has a total market opportunity that is expected to keep growing, and analysts see growth continuing in markets in 2018.
The consensus price target of $118.62 in December was the same as the prior month, but that was up from almost $114 in October. Earnings and sales growth expectations for about 10% growth seem to be the target now, and 13 times expected earnings does not exactly sound expensive on the surface. KeyBanc’s target of $125 would leave an implied upside of 30%, if that is proven correct.
The 52-week range is $73.94 to $117.65. The market cap is $17.7 billion. Shares were up 29.0% so far in 2017.
STOCKS TO OUTPERFORM APPLE & AMAZON
The Conference Board has released its December reading on consumer confidence. After coming in at a rather strong preliminary 128.6 in November, the confidence index fell to 122.1 in December. The cutoff date for the preliminary results was December 15.
Dow Jones was calling for a reading of 128.2 and Bloomberg expected the index to drop to 128.0. While such a disappointing reading might look bad here, the reality is that November’s Confidence Index was a 17-year high.
The Conference Board showed that the expectations component was what did in the report. Its Present Situation Index actually rose to 156.6 from 154.9, while the Expectations Index declined from 111.0 last month to 99.1 this month.
Other key metrics inside the readings were mixed. Consumers’ appraisal of present-day conditions was slightly more positive in December. Consumers’ assessment of the labor market was mixed, and the consumer outlook for the job market was also less upbeat than what had been seen in November.
The breakdown of statistical readings was shown as follows:
The percentage saying business conditions are “good” increased marginally from 35.0 percent to 35.2 percent.
The percentage saying business conditions are “bad” decreased marginally, from 12.3 percent to 12.1 percent.
Those claiming jobs are “plentiful” decreased from 37.5 percent to 35.7 percent.
Those claiming jobs are “hard to get” also decreased, from 16.8 percent to 15.2 percent (a 16-year low).
The proportion expecting more jobs in the months ahead decreased from 21.3 percent to 18.4 percent.
Those anticipating fewer jobs rose from 12.1 percent to 16.3 percent.
The percentage of consumers expecting an improvement in short-term income prospects increased from 20.3 percent to 22.3 percent.
The proportion expecting a decrease short-term income prospects rose from 7.6 percent to 8.9 percent.
Lynn Franco, Director of Economic Indicators at The Conference Board, said:
Consumer confidence retreated in December after reaching a 17-year high in November. The decline in confidence was fueled by a somewhat less optimistic outlook for business and job prospects in the coming months. Consumers’ assessment of current conditions, however, improved moderately. Despite the decline in confidence, consumers’ expectations remain at historically strong levels, suggesting economic growth will continue well into 2018.
CONSUMER CONFIDENCE SLIPPING