With 2016 ending the year on the heels of one of the biggest post-election rallies in history, one thing is for sure. Despite all the positives associated with the election of Donald Trump, the market is expensive, and investors need to be very selective in the stocks they buy for the new year. One area that should remain solid is technology, and sticking with the large-cap leaders may be the best play.
A new RBC research report includes the firm’s top picks for technology, and, like many we cover on Wall Street, RBC seems to favor the large-cap companies. Valuations remain compelling, and new avenues for sales and profitability, especially for the semiconductor leaders, look wide open.
Here are the five large-cap tech picks from RBC for 2017.
Apple
This technology giant has had a rough year, still down over 10% from highs posted in the summer of 2015, in a market making new highs. Apple Inc. (NASDAQ: AAPL) revolutionized personal technology with the introduction of the Macintosh in 1984, and it is among the leaders in the world in innovation with the iPhone, iPad, Mac, Apple Watch and Apple TV.
Apple’s four software platforms — iOS, OS X, watchOS and tvOS — provide seamless experiences across all Apple devices and empower people with breakthrough services, including the App Store, Apple Music, Apple Pay and iCloud.
Apple shares should end the year higher, but volatility has crept into the stock. Analysts note that the latest iPhones performed much better than the prior model, and there is big consumer interest in iPhone 8. They also stress that the company remains committed to its capital allocation program, and RBC sees the possibility for not only an increase in the dividend but continued share buybacks.
RBC cited last month the company’s gigantic cash position:
The main benefit here would come from lower taxes and more so the cash repatriation given Apple’s $230 billion+ cash reserve, 90%+ of which is offshore.
Both Trump and Congress have indicated they want to lower the tax rate on repatriating cash to the United States, with some seeing the rated dropped to as low as 8% to 10%.
Apple investors receive a 1.95% dividend. The RBC price target for the stock is $125, but the Wall Street consensus target is $131.96. The stock closed trading on Thursday at $116.29.
Broadcom
This stock has been on a roll this year and is expected to trade even higher. Broadcom Ltd. (NASDAQ: AVGO) is a leading designer, developer and global supplier of a broad range of analog and digital semiconductor connectivity solutions. Its extensive product portfolio serves four primary end markets: wired infrastructure, wireless communications, enterprise storage and industrial and other.
Applications for the company’s products in these end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.
The company produces radio frequency (RF) front-end for LTE-enabled Apple products. Wall Street estimates that the company does 15% of its total business with Apple. Top Wall Street analysts like the leadership in the mobile, data center and broadband markets, and especially in the RF arena. Many on Wall Street see a cyclical rebound in industrial and communications demand.
In regards to the company’s recent acquisition, RBC noted:
We think the Brocade acquisition could be materially accretive to Broadcom earnings-per-share once the deal closes in late 2017. While purchase accounting rules, acquisition and restructuring costs, and potential divestitures could muddle Brocade’s contribution to Broadcom during the first year post-deal close, on a normalized run-rate basis, we estimate that Brocade would contribute $1.40+ to AVGO EPS in calendar year 2018 estimated when the $250M in run-rate synergies are fully achieved, resulting in ~10% accretion to our current EPS Estimates.
Shareholders receive a 2.26% dividend. The $200 RBC price target is lower than the consensus target of $211.68. Shares closed yesterday at $180.60.
Cisco
This is one of the top mega-cap technology stock picks on Wall Street. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells internet protocol (IP) based networking products and services related to the communications and information technology industry worldwide. It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications.
Cisco offers service provider video infrastructure, including set-top boxes, cable/telecommunications access products, and cable modems, as well as video software and solutions. In addition, it provides collaboration products comprising unified communications products, conferencing products, telepresence systems and enterprise mobile messaging products; data center products, such as blade, rack and modular servers, fabric interconnects, software and server access virtualization solutions; security products, including network and data center security, advanced threat protection, web and email security, access and policy, unified threat management, and advisory, integration, and managed services. Other products include emerging technologies and other networking products.
RBC cites the company’s stellar balance sheet, and the ability for its gross margins to move close to the 65% range on a consistent basis as it moves away from the legacy products sold for switching and routing. Cisco is another company that could benefit from the tax being lowered on overseas money, as it has a whopping $71 billion in cash, 90% of which is overseas.
Cisco investors receive a 3.42% dividend. RBC has a $35 price target, while the consensus is at $33.11. Shares closed Thursday at $30.46.
NVIDIA
This top chip company has reported strong earnings all year long, and the picture continues to grow brighter. NVIDIA Corp. (NASDAQ: NVDA) is one of the leaders when it comes to supplying graphics processing technology for the 3D graphics market, including desktop graphics processors and gaming consoles.
NVIDIA is also moving into visual computing chips for cars, mobile devices and supercomputers. The company has been able to use its ability to leverage past investments, with a more controlled spending structure ahead on unified, which enables strong cash flow that is allowing a focus on capital return, which is currently estimated to be $1 billion next year.
Top analysts feel the stock is maturing to a platform company from a pure chip company, and many agree that the stock should continue to benefit from four secular trends: virtual reality, PC gaming, chips in the automobile industry and graphic processing units in the cloud.
According to the RBC report:
The company reported incredible quarterly numbers in November, and forward guidance also came in to the upside. Revenues beat consensus by 19%. Core gaming grew 62%, but datacenter grew 193% and auto grew 61% and the latter two now account for 18% of growth–a significant amount but a number that could get much bigger. We estimate $5 EPS power in 3 years. Tesla announced that NVDA GPU’s will power its deep learning system in every Tesla car and if Tesla is successful, and top analyst feel that every major Auto maker will have similar capability.
The RBC price target is a gigantic $115. The consensus estimate is $91.91, and shares closed at $107.11.
Texas Instruments
This old-school chip tech company could achieve $5 per share in free cash flow for 2019. Texas Instruments Inc. (NASDAQ: TXN) is a global semiconductor design and manufacturing company that develops analog integrated circuits and embedded processors.
The company generates 80% to 90% of its revenues from its analog and embedded processing businesses, which have well-diversified end-markets (autos, industrial, personal/consumer electronics), long product life cycles and limited capital intensity. The company has 6% market share of the auto chip market.
Numerous Wall Street pros and RBC see the company as core large cap holding, citing a solid high single-digit and very diverse revenue flow, solid capital allocation to lever the balance sheet if needed and substantial room for margin expansion as the ramp up new facilities. The company boasts sustained impressive cash flow over the past several years and has impressively returned 100% plus of that back to shareholders via stock buybacks and dividends.
Texas Instruments posted strong third-quarter numbers and also increased its quarterly dividend by 32% to $0.50 per share, or $2.00 annualized. The increase reflects the company’s continued strength in free cash flow generation and its commitment to return excess cash to shareholders.
RBC again cites the potential for reduced corporate taxes, the infrastructure spending and also increased defense spending, all as positive for the chip giant.
Investors receive a 2.7% dividend, with the new increase. RBC has set its price target at $85. The consensus price objective of $74.59 is near Thursday’s close at $74.20.
Needless to say, these stocks make good sense for more aggressive growth accounts for 2017. Given the huge run, especially since the election, investors may want to buy partial positions and see if the indexes don’t consolidate some in early 2017.
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