By Michael Brush, MarketWatch
Dividend yield: 3.3%
Market cap: $90 billion
Altman Z-Score: 3.0
Forward P/E: 22.8
March 2009 forward P/E: 18
Each time someone buys a mobile phone, Qualcomm /zigman2/quotes/206679220/composite QCOM -3.65% makes a little bit of revenue. That’s because Qualcomm is the brains behind much of the knowhow that powers smartphones, including code division multiple access (CDMA) for third generation (3G) wireless networks, and orthogonal frequency division multiple access (OFDMA) for 4G.
The wireless world is now on the cusp of another big network upgrade to 5G, and Qualcomm has a hand here, too. Qualcomm isn’t as domineering in this area, but 5G phones have to be backward-compatible, so they contain 3G- and 4G capability.
The upshot: Qualcomm’s licensing business will continue to see solid growth for years to come as 5G ramps up. The company also designs chips used in smartphones, but licensing and royalty business represents about 75% of operating income.
Importantly, COVID-19 doesn’t seem to be hurting the roll out of 5G. It’s a leading indicator for the health of Qualcomm, says the company’s CFO Akash Palkhiwala, so this is key for investors. Surprisingly, Qualcomm maintained its 2020 guidance for its 5G business in its late April earnings call. “We feel very comfortable with the full year guidance,” Palkhiwala told investors.
In a hint of what may come soon to the rest of the world, about three-fourths of mobile phones launched in China so far this year were 5G. Qualcomm also benefits from two major long-term trends: The increasing wireless capabilities in cars especially as they add self-driving capabilities, and the Internet of Things.
4. Cognizant Technology Solutions
Dividend yield: 1.7%
Market cap: $28 billion
Altman Z-Score: 6
Forward P/E: 14.7
March 2009 forward P/E: 11
For over a decade, this IT consulting and outsourcing company was the darling of growth investors. Since early 2018 shares of Cognizant Technology Solutions /zigman2/quotes/206555936/composite CTSH -1.80% have wobbled because growth slowed — and worse. Cognizant got caught up in a bribery scandal in India, and earlier this year it was crippled by a malware attack that the company believes will cost $70 million to handle.
It’s embarrassing when the tech experts you are supposed to rely on for advice on how to avoid malware attacks get crippled by one. Another issue now is Cognizant’s large exposure to financial service companies, which are suffering damage because of the weak economy and the flattening of the Treasury yield curve.
All of these problems seem like one-offs to me. Memories of scandals and mishaps fade. The economy will come back. Meanwhile, Cognizant continues to invest to expand its reach in hot areas of tech like the cloud, automation, analytics, the Internet of Things, and social media.
Cognizant gets about 75% of its revenue from North America, so it is relatively immune to trade wars. This also implies plenty of room for growth in other parts of the world. Investors don’t really believe (which makes this a contrarian play) but “reacceleration in growth is not farfetched,” says Morningstar analyst Julie Bhusal Sharma.
5. Analog Devices
Dividend yield: 2.3%
Market cap: $39 billion
Altman Z-Score: 3.0
Forward P/E: 24.8
March 2009 forward P/E: 30
Like Texas Instruments, Analog Devices /zigman2/quotes/201631938/composite ADI -0.50% is a big player in the analog chip space — especially signal processing chips. Its expertise and product lineup make it a bet on some of the biggest tech trends around. These include 5G, self-driving and electric cars (which require more and more advanced technology and sensing capabilities), and the increasing sophistication of industrial equipment. Plus, Analog Devices has a decent protective moat around its business because of its design knowhow and customer switching costs.
At the time of publication, Michael Brush had no positions in any of the stocks mentioned in this column. Brush has suggested INTC, TXN, QCOM, CTSH and ADI in his stock newsletter Brush Up on Stocks. Brush is a New York City-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School. Follow Brush on Twitter: @mbrushstocks.