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Market Thoughts, Macro Themes, and Tech Sector Outlook Heading Into 2011


Here, Sean Udall discusses his predicitions and expands on them in the new TechStrat Report. Read on to find out how to get a 14-day free trial.

7. The cloud keeps flying: I highlighted this area numerous times and this plays into two of my key central themes. Growth in tech investing at the enterprise and bifurcation within the Tech sector. Bifurcation is fully in play here as I see continued gains throughout the group but I'm also increasing my caution levels on certain names. I think the most promise still resides with SSD players, the Enterprise solutions vendors and plays in the Data Center space. I also think the iPad and proliferation of Droid based devices has created a fast growing need for mobile storage solutions, archive and retrieval.

8. Financial tech: Banks are the talk of many media outlets and I've weighed in a plenty on that group. However, a somewhat ignored group are stocks that service the banks and promote advances in financial tech and innovation. I see major growth in many areas in these verticals. I still favor and retain stakes in leading payment processors and plan on doing so for the foreseeable future. Visa (V) and Mastercard (MA) still seem particularly cheap to me. Banks also have much more spending capacity and need to utilize that. The strong will get more efficient and largely through enhancing core technologies.

EPS will continue to be strong, primarily led by continued record net interest margins. Helping the case will be continued strong trading, surging merger-and-acquisition growth, and improving asset management books coupled with shrinking writedowns. This should lead to solid if not very strong performance from companies involved in servicing this sector.

9. Tablets are just huge, this isn't a one-year phenomenon:
In last year's themes piece I stated, "The Apple (AAPL) Tablet will be another game-changing product and the next great extension of the iPhone platform. This product will be the first fully functional touchscreen computer and will usher in a new era of innovation (for Apple and certain chip companies). Apple will follow suit in the coming months/quarters with Macbooks using their proprietary touchscreen interface, which allows the company to further accelerate computing market share gains. I see Apple surpassing my low- to mid-$300s target and moved my target to the low $400s."

At that point last year, we still hadn't seen the product, the sales or just how functional the iPad was. At this point the iPad has crushed my early sales predictions (frankly I wasn't even close, even though I was about double most Wire House predictions). Currently, I've seen sales estimates which I do think might be hard to meet. But no matter how you slice it the iPad is the category leader and has produced a huge end market which others will eventually benefit from as well, notably Google (GOOG).

The net effect of all this is that I don't think the Apple trade is over. I'm sticking with my low- to mid-$400s area for now, though give me another quarter like last and I'll finally move my number higher. In trading/investing, many times you don't want to stay at the trough too long, and I've long ridden this name for years. But I also follow my disciplines and they are telling me that this stock still has potentially a stunning amount of relative value. Following through on my bifurcation thesis, Apple is very cheap relative to names like Amazon (AMZN), Baidu (BIDU), (PCLN), Acme Packet (APKT), and a slew of other names.

10. Revenge of (some of) the Old Guard: PEs at or below the market still exist in names like Hewlett-Packard (HPQ), Apple, Cisco, Microsoft (MSFT), and others. Furthermore, backing out these record-breaking cash balances further compresses all my key valuation ratios and puts these levels at historically depressed levels given the growth being generated. Further, some of the above have been much more active on the M&A front, and I think that should serve them well, especially Hewlett-Packard. Bottom line, I don't think the Old Guard in tech is dead yet.

11. The PC era ending? Intel (INTC) won't sit still: In my view, Apple has effectively created a dynamic new end market in mobility computing. It might follow that Pure PC-centric stocks could really get pinched (such as Dell). Tablets are simply a huge paradigm shift in mobile computing. Look for Intel to make at least one, or a series of moves, to buy into other areas that will give it growth outside of its main franchise. One such move I see as highly possible is Intel making a play for Marvell Tech (MRVL).

Years ago Intel looked at buying Broadcom, and senior management at Intel have said (numerous times) that they should have bought it. At this point, buying Broadcom would seem a difficult reach but Marvell Tech and others are still ripe for the taking.

12. Oh no, this is a Yahoo
(YHOO) prediction: I took a year off but am once again making a prediction regarding Yahoo this year. I think Yahoo does find a way to stay in the plus column and at a minimum outperforms the Nasdaq, if not by a substantial margin. However, I'm saying nothing regarding a merger!

13. Security within the technology/defense space: I like numerous names in this group such as L-3 Communications Holdings (LLL) and Nice Systems (NICE). L-3 in particular is a value for a few specific reasons. There is plenty afoot here and more on this later through the year. Suffice it to say that I will be allocating some funds to this area in the coming weeks/months.

14. Networking, part deux: I see Juniper (JNPR) making a move and buying a key player in the space. I had thought that Riverbed might possibly get taken out by Juniper this year but that didn't happen and now Riverbed is likely out of reach. However, there are still names remaining and Juniper has only played M&A small ball of late. Might Google (GOOG) make an entry in some fashion in this area as well or Microsoft? Years ago Google bought abundant amounts of dark fiber at pennies on the dollar. I would look for Google to start to find ways to monetize or commingle those assets in the future.

15. AOL (AOL) and Google: These could be two of the better-returning names as monetization of ad spend, content creation as well as deals to both divest and invest fuel superior returns of these 2010 laggards. Further, I think the pundits are vastly underestimating the potential positives/implications for Google's pipeline, particularly the Chrome OS. More to come through the year but if readers want to see how a similar technology theme played out, please view my writings on the iPhone as a platform from '07 & '08.

16. Old Guard, part deux: Both Hewlett-Packard and Cisco hit the comeback trail and produce market-beating returns in 2011. I have Hewlett-Packard hitting $55 and Cisco $29 next year.

17. Market forecast: The US stock market rises by 11% or more as measured by the S&P 500. Like last year, I forecast the tech-heavy Nasdaq to do better but with more outperformance versus 2010, though less than 2009. I did not include my regression-to-the-mean theme in the list this year but many of the tenets of that thesis still hold. Two-decades-long underperformance likely will be tempered, thus representing part of the potential for another double-digit year. I do see bifurcation and with that some of the largest winners could be supplanted and not perform well. Moreover, I see better/more shorting opportunities in certain areas.

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No positions in stocks mentioned.

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