Technology

SunTrust Out With High-Conviction Technology Picks for Q4

Lee Jackson

Published: October 3, 2019 6:40 am

Last Updated: January 30, 2020 3:07 pm

This year, for the first time in many years, active managers are outperforming index funds, and that should be a loud wake-up call to passive investors. After a more than 10-year bull market, the bull is tired. Although central banks are still providing a liquidity security blanket, and interest rates remain at generational lows, this looks to many on Wall Street like the proverbial “stock pickers” market.

So, many portfolio managers and investors are looking for stocks that can outperform into year’s end and generate a little finish-line alpha. The analysts at SunTrust Robinson Humphrey put together a list of 33 stocks ideas that they feel will outperform into year-end 2019.

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The SunTrust team noted this when discussing the high-conviction equity ideas:

Many of our institutional clients are looking for help as they screen for stocks that are poised to outperform into year end, with characteristics or catalysts that will likely become apparent to the market in the fourth quarter. Furthermore, with the recent increased volatility, partly driven by the “great rotation” – out of momentum/growth into value/ laggard names – we are receiving more requests from money managers for value ideas which have lagged, hence the timeliness of this effort.

We decided to look at the technology companies in the report first, and found four of the nine in the report that make good sense for accounts with a degree of risk tolerance. We stuck with the large-capitalization companies, as it appears the market may be in correction mode. All are rated Buy at SunTrust.

Everbridge

Investors may not be fully aware of this stock with big upside potential. Everbridge Inc. (NASDAQ: EVBG) is a cloud provider of critical communications and enterprise safety applications, including emergency notification, incident management, IT alerting and secure messaging.

The core emergency mass notification system enables organizations to communicate with employees, law enforcement, suppliers and other third parties over secure, reliable infrastructure across multiple communication channels (phone, text, email) in the event of local or organization-specific disasters.

Everbridge enterprise customers use its IT Alerting solution to streamline incident response and accelerate resolution in order to reduce unplanned IT work and downtime and to increase IT efficiency. IT Alerting is leveraged as an enterprisewide solution, helping organizations break down the silos between responder teams to ensure the quickest resolution to business disruptions.

The analysts’ report noted this:

We view Everbridge as a unique story associated with keeping employees/citizens safe and businesses/assets running smoothly. We believe global threat proliferation related to natural disasters, man-made tragedies such as active shooter and terrorist events and cyber attacks drive demand and catalyze revenue growth for many years

SunTrust has put a $100 price target on the shares, while the Wall Street consensus target was last seen at $74. The stock ended trading on Wednesday at $65.84, up over 3% into a bad tape.

GoDaddy

This company is probably the most well known for constructing websites. GoDaddy Inc. (NYSE: GDDY) is a technology provider to small businesses, web design professionals and individuals. It delivers cloud-based products and personalized customer care. The company operates a domain marketplace, where its customers can find the digital real estate that matches their idea. It provides website building, hosting and security tools to help customers construct and protect their online presence.

GoDaddy provides applications that enable connecting to customers and managing businesses. It also provides search, discovery and recommendation tools, as well as a selection of domain name for ventures. It provides productivity tools, such as domain-specific email, online storage, invoicing, bookkeeping and payment solutions to run ventures, as well as marketing products.

We believe that GoDaddy continues to be opportunistic with respect to tuck-in mergers and acquisitions while remaining on the lookout for larger deals that fit the bill (operationally, strategically and financially). Given the declining leverage, a growing cash pile and conclusion of the CEO search, we’d not be surprised to see a more active use of cash for share repurchases.

The SunTrust price objective of $90 compares to the consensus target price of $83.81. The shares last traded on Wednesday at $62.62, almost 40% below the SunTrust target.

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This sector leader made a huge purchase in the spring. Nvidia Corp. (NASDAQ: NVDA), a company that rarely has grown through acquisitions, bought Mellanox and paid $6.9 billion in cash. In what actually was somewhat of a duel, Nvidia knocked out Intel in its bid to buy the chipmaker, and the deal will help Nvidia boost its business of making data center chips that help power cloud computing.

Mellanox’s BlueField intelligent network adapters are another version of data center co-processing acceleration. Top Wall Street analysts see the combination of Nvidia and Mellanox as a definite threat to Intel’s data center CPU dominance of workloads. This indirect competition could ultimately be a problem for Intel shareholders.

Nvidia also announced in the summer that Minecraft will now support raytracing with the introduction of real-time DXR raytracing for Windows 10. Minecraft is being refitted with path tracing that allows for life-like lighting, reflections and shadows. Overall, the announcement is a notable positive for the future of the RTX platform, as one of the bear-thesis items surrounding raytracing was the lack of titles. The addition of Minecraft (one of the most popular games) should help quell fears surrounding adoption from other high-quality titles in the future.

The report notes the past struggles:

The company severely under performed peers and the broader S&P in late 2018 when the company’s Data Center end market slowed. More recently, the stock has begun to outperform as management’s optimism for a recovery is becoming more believable. More important to us, our industry contacts indicate two large cloud service provider customers are in the early stages of placing new orders that will cause an inflection in this segment’s growth trajectory over the coming quarters.

The SunTrust price target is $216, well above the $182.72 consensus target. The stock closed most recently at $173.04 per share.

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Square

This is another stock that came out with big fanfare, but it has seen some serious selling since the summer. Square Inc. (NYSE: SQ) develops and provides payment processing, point-of-sale, financial, and marketing services worldwide. It provides Square Register, a point-of-sale software application for iOS and Android, which enables sellers across a range of business types to itemize products or services for faster checkout.

Its Square Analytics shows sellers how their businesses are performing, and the Instant Deposit service sends funds from a sale immediately to a seller’s bank account. Square Reader is for magnetic stripe cards, EMV chip cards and NFC, which connects wirelessly to mobile devices.

The company also provides Square Capital, a financial service product, which provides merchant cash advances to prequalified sellers, as well as Square Customer Engagement, a marketing service product, and Caviar, a food delivery service. The analysts said this in their coverage of Square:

The company’s leading technology and growing Cash App ecosystem offer superior functionality and value to growing businesses, in our opinion. As a result, we view the company as positioned to take meaningful share in the $7 trillion domestic Electronic Payments market,

The SunTrust price objective is $80. The posted consensus target is $78, and shares closed Wednesday at $60.08 apiece.

These four top technology companies all have solid franchises that are built for success now and well into the future. All make good sense for aggressive growth accounts looking to add quality companies at a good entry price. Again, with the potential for continued selling, it makes sense to nibble now and see how things play out.