Typically, I have little interest in the hottest stocks on Wall Street. There is much to be said for being fearful when others are greedy. After all, how much buying pressure can be left to bid up a stock after every guppy on Main Street and every shark in a thousand dollar suit owns shares?
This week, I took a look at some of the most popular surging tech stocks in an effort to prove they were cruising for a crash. Instead, I found something quite interesting: In some of these cases, conventional wisdom seems to hold up quite well in these trendy trades.
These obviously aren’t the kind of picks that will double your cash in a few months — the word is out on these hot stocks, and some big gains are already in the rearview mirror. But in this volatile market, you may do well to “settle” for double-digit gains from these big-name stocks — even if they are already household names.
Without further ado, here are three high-priced tech stocks that are worth every penny:
Apple (AAPL)
At about $350 a share, Apple (NASDAQ: AAPL) is one of the priciest stocks on Wall Street. But time and time again, the House that Jobs Built proves that it is just as powerful as every armchair investor claims it to be.
So is it overbought? Maybe not.
Despite the hype, Apple has a forward P/E of just 12.1. By comparison, now-sluggish Google (NASDAQ: GOOG) has a forward P/E of about 13.6 and Motorola (NYSE:MMI) is just shy of 14.1. What’s more, despite a 5% run in the last several trading days, AAPL stock is still shy of its February peak of around $365. There’s another 5% or so for shares to run before Apple hits a new 52-week high.
On the earnings front, Apple has been simply phenomenal — topping forecasts by a dollar a share in its last two quarterly reports. When a $320 billion company that is so closely watched by experts trounces expectations so soundly, it proves Apple has deserved some of the hype. Last quarter, shares jumped 6% in two days after strong numbers were released, proving that big numbers can still cause a big move for Apple.
In regard to product development, Apple continues to innovate. Its iCloud technology could take Apple’s near-monopoly digital music model to the next level, a highly-anticipated iPhone 5 will launch this fall on both AT&T (NYSE: T) and Verizon (NYSE: VZ) networks, and an iPad 3 will roll out within the next year to keep Apple’s tablet dominance firmly entrenched.
And last but not least, it’s worth noting that nearly every analyst watching Apple has a buy on the stock. AAPL shares have a mean target of $448 and a median target of $450 according to 48 brokers surveyed by Thomson/First Call. That’s an average of a 28% gain above current pricing.
Just about the worst you can say about Apple is that some Wall Street experts are not the fanboys they once were. Consider Oppenheimer, which recently cut its price target from $450 down to $420 based on doubts of how well the new Apple iPhone will perform with such a crowded release schedule and a late debut in 2011.
Uh oh, only 20% upside according to this target. Better run for the hills.
Apple shares are some of the priciest on Wall Street and everybody and their brother is in love with the stock. While there’s certainly reason to fear herd mentality, many signs point to a buy on Apple.
Priceline (PCLN)
Priceline (NASDAQ: PCLN) helped redefine the travel business and is a global powerhouse in booking airfares, hotels and rental cars. Priceline has marched rapidly upward since 2006. The average annual return for PCLN has been well north of 75% for each of the last five years.
You may think that as a consumer-focused stock, this company doesn’t have the numbers to back up its recent red-hot run — but its May earnings say otherwise. In the first quarter of 2011, revenue increased by 38.5% to $809.3 million and gross bookings spiked by 57.3% to $4.7 billion. This proves that even though online travel services have been around since the mid-1990s, there is still much room for growth — even in tight economic times.
Perhaps the most important move from Priceline has been to aggressively get into European and Asian travel markets. Acquisitions of Booking.com in 2004 and the buyout of Agoda in 2007 have really started to pay dividends in the last few years.
As with Apple, you’d be hard-pressed to find an analyst who is willing to bet against Priceline stock. The median price target according to 15 brokers surveyed by Thomson/First Call is $628 and the mean price is $628.80. That’s 17% above current pricing of $535 a share. In fact, the most recent price target came from Deutsche Bank after earnings in May — with the firm reiterating its “buy” rating and pushing its target up dramatically from $540 to $625 a share.
PCLN has topped earnings expectations for each of the last four quarters and is expected to see revenues grow by 35% to 40% this year. Just imagine what will happen if the economy stabilizes in 2012 and travel spending firms up!
Yes, Priceline continues to face competition from Expedia (NASDAQ: EXPE). Expedia stock itself has seen a nice 60% gain in the last 12 months, as it too sees improving numbers. There are also upstart travel companies like Kayak.com and Hipmunk.com that are currently eating the crumbs — but looking for a bigger piece of the online travel pie. And perhaps most worrying to some, Priceline trades at almost 50 times trailing earnings and 20 times forward earnings compared to top competitor Expedia’s trailing P/E of 20 and forward P/E of just 14.
Still, it’s hard to argue that Priceline hasn’t earned its stratospheric share price of around $535. If the trend keeps up, that valuation could be a bargain.
IBM (IBM)
Recently turning 100 years old, IBM (NYSE: IBM) is part of Wall Street’s old guard. But unlike other centenarian stocks like Procter and Gamble (NYSE: PG), IBM isn’t your sleepy old blue chip throwing off juicy dividends and slow growth. This tech giant knows how to evolve and continues to reinvent itself for the 21st century.
Over the past five years, the average annual return on IBM stock has been 17.4%. Shares have doubled the Dow Jones in the last 12 months, tacking on 43% vs. about 20% for the major index.
Of course, IBM’s share price of $175 is seen as awfully rich for some investors. IBM has a forward P/E of 12 — significantly pricier than tech majors Cisco (NASDAQ: CSCO) Hewlett-Packard (NYSE: HPQ) and Microsoft (NASDAQ: MSFT).
But the company continues to impress both analysts and investors alike. IBM has topped expectations for each of the last four quarters. And though its current annual revenue of $100 billion isn’t all that different from sales totals in the last few years, IBM earnings per share have soared from $7.18 in fiscal 2007 to $11.52 in fiscal 2010 — and a projection of $13.25 this year. Even on flat revenue, that kind of profit growth is worth noticing.
What’s more, the outlook for 2012 and beyond is bright. Few companies have the global scale and massive customer base of IBM. The tech giant has been smart with its acquisitions and product development. The 2010 buyouts of Netezza and Unica will get IBM into Web analytics and Web marketing applications that will be increasingly important amid the cloud computing craze — and its renowned server and Web infrastructure businesses are also at play in the cloud revolution.
Standard & Poor’s has a 12-month target of $196 — a 12% upside — based on IBM’s scale and ability to succeed in a highly competitive pricing market right now. If we see some stability in the corporate IT marketplace across the next several months, there could be some big things in store for IBM in early 2012 as companies look to find efficiencies and competitive advantages via cloud computing technologies.
Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
