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Inside Wall Street


IBM: First Out of the Gate?

Technology stocks, pummeled as badly as the rest of the crowd, may be one of the first sectors to come streaking back when the market turns. So say some large institutional investors. "Technology is one of the most attractive sectors," says Robert Sharps, who manages growth stock portfolios for institutional clients at T. Rowe Price (TROW), a major asset manager. Many technology companies are flush with cash, he notes, and their free cash flow yields are higher than they have been in a long time. Tech stocks don't always outperform coming out of a downturn, but when they do, it's by a wide margin. "I think this is one of those times," says Sharps.

So how do you play the next tech upswing? "Don't look any further than IBM," asserts Graham Tanaka, president of Tanaka Capital Management and manager of the Tanaka Growth Fund (TGFRX). One of the world's largest technology companies, IBM (IBM) (IBM) provides computer hardware, application and systems software, and related services. "Look at it this way: IBM is the only tech company I know that beat analysts' fourth-quarter profit expectations, even as revenues declined, and then issued a 2009 earnings forecast higher than what the Street was projecting," says Tanaka. "In the current dismal environment, IBM has been phenomenal," he says. Now trading at 92.83 a share, IBM has skidded from a 52-week high of 130.93 last July 24. Tanaka figures the stock is worth at least 117, based on 12 times his projected 2010 earnings of $9.75 a share. On top of that, IBM pays a dividend yield of 2.2%, he notes. "IBM is a safe haven during the global recession and will be an early participant in the recovery," he says.

IBM forecasts earnings of $9.20 a share in 2009, up from $8.93 in 2008. What has greatly enhanced IBM's performance is its increased focus on its software systems and services, with less emphasis on hardware. Software accounts for some 44% of profits, services make up 36%, and hardware/technology 17%. IBM has been boosting margins through increased cost cutting, including labor cutbacks, and share buybacks.

Peter Misek of Canaccord Capital says IBM remains "one of our favorite large-cap defensive tech names" based on its track record to date, balance sheet, cash flow, and global footprint.

Amitabh Goel of research outfit First Global, who rates IBM "moderate outperform," says IBM has been focusing on boosting margins to counter the decline in revenues and deliver tidy profits. As a result, IBM appears to be a "safe bet" amid the global uncertainty, says Goel.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Varian Is a Force Against Cancer

With the recession forcing hospitals to cut back on spending, analysts expected disappointing December-quarter news from Varian Medical Systems (VAR) (VAR), the leading global supplier of equipment and software used in cancer treatment, including X-ray tubes and imaging systems. Instead, Varian posted better-than-expected operating earnings of 56 cents a share, up from 46 cents a year ago.

Cindy Axelrod of Glenmede Investment Management, which owns shares, says hospitals aren't likely to cut back on buying Varian products since oncology is one of the most profitable units in many hospitals. She rates Varian, now at 37.12 a share, a buy. It's up from its 52-week low of 30 on Jan. 8.

Dalton Chandler of investment firm Needham also tags Varian (a client) a buy. He sees it at 65 in a year, based on his estimate of $2.60 a share in 2009 and $2.96 in 2010.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.


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