Rotate From Growth To Value But Don’t Cut Out Tech
There may be a “great rotation” from high-growth tech to value but that doesn’t mean tech is out. There are a large number of well-known if not heavily trade tech names that not only offer a value but a great dividend as well. In today’s news, Cisco (NASDAQ:CSCO) and Applied Materials (NASDAQ:AMAT) reported earnings and highlight that very fact. Both company’s are producing solid returns for investors, both pay safely growing dividends, and both offer a deep value relative to the broad market and their higher-profile tech cousins. Amazon, Apple, and Microsoft are all trading in the 30X earnings range and their yields are pathetic.
Applied Materials Price Targets Raised After Calendar Q3 Results
Applied Materials is the lesser of the two stocks I am highlighting today but only in terms of the value and yield. Applied Materials is trading about 15X this year’s earnings and 14X next’s with a yield near 1.26%. The 1.26% isn’t much compared to the broader market’s 1.75% but remember, the S&P 500 is trading with a valuation near 22X its forward earnings and no bargain. Regarding the dividend health, history, and outlook, the company has been increasing the payout for three years at a 15% CAGR and is only payout out 19% of its consensus earnings. That gives no reason to fear and every reason to expect a fourth consecutive increase early in calendar 2021.
Applied Materials calendar Q3/fiscal Q4 earning report is nothing less than stellar. The company reported a 25% increase in net revenue, expanding margins, and a 56% increase in YOY earnings. The company reports strong gains in all three segments with notable strength in the core Semiconductor Systems segment (up 33%) and an 11% gain in global services. Display and Adjacent saw a moderate 6% YOY increase. Margins increased by 200 basis points and he guidance is very positive. The company expects both revenue and EPS in a range well above the current consensus estimate.
Applied Materials received no less than three analysts nods in the wake of the report. The analysts expect to see the company make solid market-share gains in DRAM over the next and drive better than even-now-expected results. Shares of the stock are already in an uptrend but it is not too late to get in. On a technical basis, investors might expect another $15 upside in the near-term, enough to match the most recently set price targets of $80 to $90.
Cisco Is A Deep-Value And High-Yield
Cisco is by far the deeper value and better yield. Trading at 12.50X and 11.50X its earnings it offers a significantly great opportunity and the outlook for dividend growth is equally attractive. The payout ratio is higher but still manageable at 47%. The balance sheet is immaculate, the leverage ratio is 1X and total debt is very low, so absolutely no worries there. The growth history dates back 9 years, the CAGR is near 14% and the stock is yielding over 3.7% with shares trading near $38.60.
"Our Q1 results reflect good execution with strong margins in a challenging environment," says CFO Kelly Kramer. "We continued to transform our business through more software offerings and subscriptions, driving 10% year-over-year growth in remaining performance obligations. We delivered strong growth in operating cash flow and returned $2.3B to shareholders."
The calendar 3Q report was so good that shares are up more than 8.0% on the news. Investors looking to get into this stock should not chase prices, however. The price action is going to gap up strongly at the open so I would expect at least a little intraday weakness if not a full closure of the gap before longer-term gains can occur. Longer-term, I see 20% to 40% gains for this stock over the next 2 to 4 quarters.
Featured Article: Street Name7 Bellwether Stocks Signaling a Return to Normal
Bellwether stocks are considered to be leading indicators about the direction of the overall economy, a specific sector, or the broader market. They are predictive stocks in that investors can use the company’s earnings reports to gauge economic strength or weakness.
The traditional definition of bellwether stocks brings to mind established, blue-chip companies. They are the home of mature brands with consumer loyalty. These may be stocks that aren’t associated with exceptional growth; some may be dividend stocks.
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View the "7 Bellwether Stocks Signaling a Return to Normal"
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