Stock Market 2008: Information Technology (Part 1)
Author: Jim | Filed under: Sector OutlookDespite recent turmoil in the IT sector for 2008, I contend that this is now where you want to be. Reasoning here follows that the financial sector is struggling to keep its bad news buried, the housing market is shambles and even retailers are struggling to sustain growth. A move toward tech seems fully logical due to typically strong international exposure, confident balance sheets and the fact that IT stocks hold a historically low correlation to the broader markets. Lets pick some technology bulls.
Consumer Electronics – Jimvesting picks Apple (NYSE: AAPL)
Hey Mr. Market, why so down on Apple? The iPod business is fully matured. The iPhone is losing inventory to similar devices. MacWorld was missing its usual superstar prospect. I tell you what, take this news and know that Apple has historically done 
its best when sentiment is low. Steve Jobs & Co. is my favorite IT pick for 2008. The downside has opened up value in the stock, and I feel they have bottomed!
Looking further into the concerning issues. The iPhone was selling less because of Apple’s push into the new iPod Touch, the analysts at Needham noted that “Apple would have sold close to four million iPhones in its absence.” Add this to the fact that an estimated 25%-30% of iPhones were “unlocked” from AT&T, a number that actually benefits AAPL through the carrier’s headache. While iPod sales were slowed, I feel that the mp3 device is merely in a transitioning 
phase, and interesting opportunities are now raised in mobile technology.
I feel that AAPL may be a recession resistor. Mac business is healthier than ever, and single-handily offset losses in iPods. Investors are punishing high-end firms like Apple for any disappointments. The stock is 35% off its highs, trading at a premium 24-times-earnings compared to its peer’s 32x and has a PEG of 0.7x. They’ve got the free cash flow we love ($6.78/share est. 2008) and its business segments have never looked healthier. People are hating on this company for no reason. As Warren Buffet puts it: “Be fearful when others are greedy, and greedy only when others are fearful.”
Comm. Equipment – Jimvesting picks Corning (NYSE: GLW)
Corning is the company you want for LCD glass panels. This market is thriving with bigger and badder television sets coming out on the daily. Fourth quarter results showed that management feels the same due to continued investment in facilities and solid relationships with market leaders. 2008 outlook was VERY positive and new revenue streams should be found in an estimated 60%+ growth in LCD capital spending. GLW anticipates releasing a new flexible fiber glass material and should see appreciation from the
coming adoption of mandated diesel filtration. No major catalyst is driving growth, which is definitely odd, but an attractive valuation recovers most of the risk.
Outside of LCD glass, Corning is still running the table. A new “Gorilla Glass” product that enabled touch-screen entry has become readily sold to handset manufacturers. Corning seems to understand the shift to mobile technology, and is really on the ball. With this in mind, Standard and Poors added: “sales acceleration to 17% growth in 2008, up from 13% in 2007, aided by currency benefits and more importantly due to higher demand for liquid crystal display (LCD) glass substrates from TV and computer manufacturers.” Everything is coming together for Corning, even Verizon is on board, a new buyer of GLW’s “ClearCurve” cable 
solutions. ClearCurve is the world’s most bendable fiber, 100x more bendable than regular fiber… which is apparently very important. This new technology could unlock huge potential with the support of an industry leader in FiOS.
Corning should be a core technology holding for every investor. They remain inexpensive with a PEG at 0.83x and a forward PE at 13x versus an estimated trading value closer to 20x. There are some risks presented by overcapacity in the LCD glass industry and potentially slowed IT spending. However, I feel as though retailers will continue to purchase the glass for bigger screens, and the fiber for faster internet. If they are overstocking and cannot sell, that is their problem… not Cornings. These guys beat earnings by a penny, and their outlook only improved. They are bulls across the board, and deserve to trade at a premium in my opinion.
I noticed how much I have to say about the Information Technology sector, with so many macro- and micro- factors coming into play for 2008. It is essential to not skip over details, so we are breaking the stock picks into two posts. Don’t worry, we’ve got two more killer stocks coming tomorrow… you won’t want to miss it!
-Jimvesting
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Twitter: @jimvesting
February 18, 2008 at 5:02 pm #
The next post is coming! Stay tuned for two more tech companies tomorrow morning, come back to find out who the winning picks in the industry are
I agree with your assessment that AAPL is a great growth story at a reasonable price. However, I feel the use of the Buffett-ism is inappropriate. No way would he endorse a stock trading at these levels. This is a GARP play rather than a value play.
I am not sure I would consider AAPL a recession resistor. I think it may get hurt in the margins when the consumer is pinched. Demand from the AAPL fanatics will probably not change but the customers fueling the growth will definitely feel the pinch. It reminds me of a guest on CNBC referring to Tiffany’s ghetto appeal.
What’s your buy point on AAPL? Tight stop?
Twitter: @jimvesting
February 18, 2008 at 11:06 pm #
No tight stop here. I am not necessarily recommending buying Apple immediately… but I do not see them dropping much farther. They are an excellent long-term pick up in my opinion.
You need to step outside of technical analysis to see this one. They were trading at 200 and are now under 125… and on what? A bunch of poor news that ended up being positive news that was negatively spun. This is indeed a value play in my opinion because I feel that they have been unfairly beaten down and as long as investors remain fearful, they will remain in a slump. However, I see sentiment turning around in the short term which should allow for some nice gains.
It’s interesting how we can have such different opinions on the same data. I look at the stock has having ‘frothed’ up to 200 on nebulous data. 120 is probably a reasonable price for the stock but I’d rather buy it at under 100.
According to my options trading strategy (track b), I am looking to sell the Jan 09 100 strike. That’s some easy money if you are right. I am trying really hard to see your view. It is so tempting.
Twitter: @jimvesting
February 19, 2008 at 7:14 pm #
This is the magic of the stock market. I know from a technical standpoint I would agree with you. I would really prefer to buy around 110 (or 100 if possible). However, a lot of times we see companies trading at premiums and doing fine. In this case, I contend that Apple deserves to trade at higher multiples then their competitors and is a good long term asset.
Its great to see varying opinions!
I am reading this post after almost a year from its original publish date and it seems like some of your predictions came true, specially in Apple’s case
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