Given the recent firestorm of selling in tech, Baird’s Technology Research team is highlighting underperforming stocks that they believe are positioned for stronger performance within the current macro backdrop. The team believes companies on this list represent “quality at a reasonable price,” or QARP, with long-term sustainable business models, quality management teams, and large addressable markets. For perspective, the team’s prior list of QARP stocks during a previous market pullback outperformed relevant indices (+29.4% vs. 9.2% for S&P and +18.3% NASDAQ).
We don’t have time to cover all of Baird’s picks and pans today, but let’s at least survey the biggest three and see if we can figure out why the brokerage firm likes them:
- Alibaba (BABA) – Outperform rated: BABA currently trades at its lowest forward EV/EBITDA multiple (~17x) in almost three years, as concerns over China macro issues, the US/China trade dispute, and margin compression from “New Retail” investments monopolize investor attention at the expense of significant secular growth opportunities and newer initiatives. Near-term Core Commerce trends could be muddied by a pivot toward more product recommendations with Taobao, but as New Retail investments scale, we believe Alibaba is creating a template for long-term growth with solid operating margins.
- Apple (AAPL) – Outperform rated: AAPL remains our top large-cap idea. We are encouraged with early sales results for the iPhone XS and iPhone XS Max, which we believe could provide upside to ASP forecasts. We also remain positive on the Watch Series 4, broader services opportunity and continue to view free cash flow and valuation as attractive.
- Intel (INTC) – Outperform rated: We find Intel’s valuation, at 11x our 2019 EPS estimate, particularly attractive given the company’s high gross margin profile, an expected closing gap between FCFs and EPS notably as 10nm ramps starting 2H19, and sustained market share leadership in computing platform solutions including both hardware and software. We believe concerns including gross margin deceleration, a slowdown in DCG growth driven by competition from AMD, and uncertainties around 10nm execution, are fully priced in.