The Top 10 Tech Stocks Now, Ranked By Expected Returns

Investors have traditionally purchased technology stocks for their outsized growth potential. But in recent years, tech stocks have also embraced paying dividends as a way to reward shareholders. And while the tech sector is still the primary place to look for growth stocks, it is now a strong source of value and income stocks as well.

At the same time, some investors may be turned off by tech stocks, as many are inconsistently profitable or trade for sky-high valuations. With this in mind, we have created a list of large-cap tech stocks that are profitable and hold reasonable valuations. Many even pay dividends, with the potential to increase their dividends on a regular basis.

The list is derived from the most well-known tech sector exchange traded fund, the Technology Select Sector SPDR Fund (XLK).

Tech Stock #10: Corning (GLW)

  • 5-Year Annual Expected Returns: 9.2%

Corning operates in five segments: Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, and Life Sciences. The $22 billion market cap company generates over $1.5 billion in annual core earnings.

On July 30th, Corning released second-quarter results. Corning reported $2.99 billion in core sales, representing an 8% year-over-year increase compared to Q2 2018, as four of the company’s five segments posted double-digit growth. Core earnings came in at $410 million, a 14% increase, while core earnings-per-share increased 18%. Environmental Technologies was the strongest performer for Corning last quarter.

GLW Growth

Source: Earnings Slides

Corning also updated its full-year 2019 outlook. Display Technologies and Optical Communications sales are anticipated to grow by a low-to-mid single digit percentage, while Environmental Technologies is expected to grow by over 10% to lead the company’s growth.

Corning has strong growth prospects ahead. The company enjoys a leading position in fiber-optic cables, LCD’s, screens, and specialty glass. Smart phone glass will continue to be an important part of the business, but increased optical fiber usage from areas like the Internet of Things, 5G mobile technology and autonomous driving could also drive future growth. Share repurchases will also help boost earnings-per-share growth, as Corning has approved a $5 billion share buyback program.

Corning stock has a price-to-earnings ratio of 14.8, which is just below our fair value P/E estimate of 15. Therefore, valuation changes will only add 0.4% to Corning’s annual returns. Total returns will be based primarily from expected EPS growth (6%) and the 2.8% dividend yield, producing total expected returns of 9.2% per year through 2024.

Tech Stock #9: Intel Corp. (INTC)

  • 5-Year Annual Expected Returns: 10.0%

Intel is the largest manufacturer of microprocessors in the world. The company ships about 85% of the world’s microprocessors. Intel also manufactures products like servers and storage devices that are used in cloud computing. Intel generates annual revenue above $69 billion and the stock has a current market capitalization of $225 billion.

Intel released financial results for the second quarter on July 25th. The company earned $0.92 per share, which was $0.08 higher than analysts had expected, but represented a 13.4% decrease from the previous year. Revenue declined 2.7% to $16.5 billion, but topped estimates by $825 million.

Overall, the data-centric businesses declined 7% year-over-year. Revenues for Data Center decreased 10% to $5 billion. Declines in cloud and government revenue more than offset a 3% gain in the communications service provider business.

INTC Segments

Source: Earnings Slides

Going forward, we expect 5% annual EPS growth for Intel. Revenue growth will be fueled by new growth areas such as the Internet of Things, or IoT. Intel has a big lead in this emerging growth segment, as its Internet of Things Group grew revenue by 12% to nearly $1 billion last quarter.

Separately, Intel’s $15 billion acquisition of Mobileye is a growth catalyst. Mobileye’s revenue was a record $201 million, an improvement of 16% from the previous year.

Intel stock trades with a 2019 P/E ratio of 11.5, compared with our target P/E of 13 which we believe to be fair value for a highly profitable industry leader. Expansion of the P/E ratio could boost annual returns by 2.5% annually over the next five years.

Intel stock also has a current dividend yield of 2.5% right now. Combined with annual EPS growth estimates of 5%, Intel stock has a total expected return of 10% annually through 2024.

Tech Stock #8: International Business Machines (IBM)

  • 5-Year Annual Expected Returns: 10.6%

IBM is a global giant with $80 billion in 2018 revenue, while the stock has a market capitalization of ~$127 billion. The company has five business segments: Cloud & Cognitive Software, Global Business Services, Global Technology Services, Systems, and Global Financing.

IBM reported mixed second-quarter results. Revenue declined 4.2% to $19.16 billion, while organic revenue fell a more modest 1.6%. Diluted EPS grew 8% to $2.81 in the quarter, and beat expectations by $0.09 per share. By segment, operational revenue increased 3.2% in Cognitive & Software; and 3.4% in Global Business Services. Offsetting growth in these areas was a 3.5% organic revenue decline in Global Technology Services; an 18% decline in Systems; and an 8.5% decline in Global Financing.

On July 9th, IBM announced it closed on its $34 billion acquisition of Red Hat Inc. to boost its cloud platform.

IBM Cloud

Source: Investor Presentation

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