By Daniel Newman
Since the onset of the coronavirus pandemic in March 2020, the Big Tech trade has really delivered for investors, as lower interest rates, massive liquidity and digital-transformation investments have driven companies including Microsoft /zigman2/quotes/207732364/composite MSFT +2.76% , Nvidia /zigman2/quotes/200467500/composite NVDA +5.38% , Alphabet /zigman2/quotes/205453964/composite GOOG +4.16% and Apple /zigman2/quotes/202934861/composite AAPL +4.08% to new highs.
While there is little to indicate that demand for tech will subside any time soon, the recent technology-stock selloff shows investors are rotating into more stable value plays.
With interest rates all but certain to rise in a Federal Reserve-induced effort to cool red-hot inflation, I believe some names have the potential to serve as both value and growth for investors.
These companies, below, represent a blend of stability, innovation and yield while trading at significantly compressed ratios against forward earnings. And while the upside certainly won’t be as high as some of the Big Tech stalwarts, these better-valued companies provide a balance that may weather roiling markets all the while returning dividend income to shareholders.
Here are six companies to consider owning:
Technology isn’t a word that comes to mind when mentioning Honeywell /zigman2/quotes/205583690/composite HON +1.68% , but it should be. A pivot to software for the industrial edge has the 116-year-old company now doing more than a billion dollars in revenue in those products. Honeywell has positioned itself well to benefit from the exponential growth of data being created outside the data center.
I recently had the opportunity to sit down with CEO Darius Adamczyk . With the stock trading in the middle of a 52-week range, the company’s 1.81% dividend yield makes it an appealing play despite recent downgrades from Credit Suisse and Bank of America. The company represents a potent blend of value, rotation and technology that should better weather any major turbulence in growth names.
Hewlett Packard Enterprise
Three years ago, newly minted Hewlett Packard Enterprise /zigman2/quotes/201998588/composite HPE +4.64% CEO Antonio Neri aggressively committed to pivoting the company to everything-as-a-service, taking the entire portfolio and making it consumption-based for its enterprise customers.
That means it’s effectively becoming an on-premises cloud for nearly 75% of IT workloads that aren’t on AWS, Azure or other public clouds. The company saw revenue growth for fiscal 2021, albeit only 3%, but order growth was 16%. Furthermore, the company’s GreenLake private cloud as a service jumped 36% to nearly $800 million in revenue, with order growth for its overall as-a-service revenue up more than 100%. Trading at less than seven times trailing 12 months (TTM), HPE has been largely written off by investors despite its progress under Neri. At around $16 per share, the company has a dividend yield of about 2.8%, offering value investors income while waiting for the share price to appreciate.
Oracle /zigman2/quotes/202180826/composite ORCL +1.56% had a tremendous 2021 that returned investors over 39%. The company is as steady as they come. With over 70% of its revenue coming from predictable streams, and a fast-growing $10 billion-plus per year cloud business, there is a lot to like about Oracle. While some growth names are likely to see earnings compression in the coming year, Oracle toes the line between value and growth, and with a forward price/earnings of around 18, its price is still tame compared to just about all high-growth names. Oracle raised its dividend last year, offering investors 1.48% at its current price.
Cisco /zigman2/quotes/209509471/composite CSCO +1.40% and its massive enterprise technology portfolio provides a nice mix of growth, value and yield for investors that see secular trends like hybrid work, cybersecurity and 5G as sustainable growth areas but is looking for a less volatile place to invest. Growth for Cisco has picked up the past few quarters, and the share price has seen appreciation recently rising above 60.
However, with its forward P/E for 2022 trading below its actual for FY 2021, there seems to be some runway for growth. And, with its diverse product mix touching so many key areas, it makes for a safer play when higher growth names see a pullback. Cisco offers investors a current yield of just below 2.5%.
Perhaps a less visible name than others in this group, I think Juniper /zigman2/quotes/207361368/composite JNPR +1.96% presents an interesting opportunity for investors. The company has been aggressively implementing artificial intelligence into its portfolio of networking and security solutions and has also seen significant diversification out of its core customer base of telco and service providers while adding large enterprise and cloud customers.
In its most recent quarter, six of Juniper’s top 10 customers were cloud, and its revenue from cloud companies grew 20%. Software and annual recurring revenue (ARR) growth also warrant attention as the company saw a 67% growth in software revenue and 34% growth in ARR. Juniper’s dividend yield is 2.34%.
Under CEO Arvind Krishna, IBM /zigman2/quotes/203856914/composite IBM +1.74% has narrowed its focus to key growth areas such as cloud and artificial intelligence, and out of some of its slowest-growing segments, which was evident with its recent spin-off of Kyndryl.
Since investors’ rotation out of certain tech and growth names started in November, IBM has seen its share price rise more than 10%, representing a big move for Big Blue. With one of the highest dividends — 4.87% — in the Dow Jones Industrial Average, the stock is still trading at around only 12 times 2022 projected earnings. It’s early days for IBM’s turnaround, but I like its more focused approach, and its low valuation makes it an appealing play for value investors who want to stay close to tech.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising, and/or consulting to Honeywell, Hewlett Packard Enterprise, Oracle and other companies mentioned in this column, as well as dozens of others. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter @danielnewmanUV.