UBS Says Own Only These Five Top IT Technology Stocks for Big 2014 Gains

One thing is for sure as the new year in trading has started to unfold. We have not met a firm on Wall Street that does not like technology for 2014. For once, maybe the herd mentality is correct. With most strategists seeing higher interest rates this year and into 2015, technology stocks tend to do well in rising interest rate environments. Typically they have low or no debt, and they do not tend to build huge inventories. They also underperformed the market in 2013, and they look to be a solid bet for this year.

The UBS technology team is in lockstep with the rest of Wall Street. They see a bifurcation in tech coming into 2014, with high-multiple software and Internet stocks outperforming legacy vendors. In fact, the revenue multiples of some of the high flyers equal the price-to-earnings multiples of some of their companies. While they think IT budgets will improve this year, they say to stay focused on just five top names.

Here are the five top IT hardware technology stocks to buy for 2014.

Apple Inc. (NASDAQ: AAPL) continues to be a top name to buy at UBS for 2014. The company has finally completed a long-awaited gigantic new deal with China Mobile to sell its smartphones and tablets there. The Chinese market has more than doubled in size in the past two years and still has a low penetration rate. Investors are paid a 2.3% dividend, which may be going higher in 2014. The UBS price target for the stock is $650. The Thomson/First Call price target for the stock is $595.73. Apple closed Thursday at $554.25.

EMC Corp. (NYSE: EMC) dominates large-scale storage, and its large ownership interest in cloud software provider VMware is an added benefit for investors. The company’s $6 billion buyback for the three years to December 2015 is on schedule with approximately $3.5 billion remaining. Management stated its long-term intention to return about 50% of free cash flow to shareholders, with half from buybacks and half from dividends. Despite recent weakness in infrastructure, EMC has been able to grow revenue by a 10% compound annual rate over the past five years and has increased free cash flow by an annualized 18% over the period. Investors are paid a 1.6% dividend. UBS has a $30 price target set, while the consensus is at $29.65. EMC closed Thursday at $26.37.

EPAM Systems Inc. (NYSE: EPAM) primarily provides software product development services worldwide. The company offers product research, design and prototyping, product development, component design and integration, full life-cycle software testing, product deployment and end-user customization, performance tuning, product support and maintenance, and porting and cross-platform migration. UBS likes the mini-theme of Eastern European services companies, and EPAM fits the bill perfectly and could be a take-out candidate. The UBS price target for the stock is $44, and the consensus is at $37.13. The stock closed Thursday at $38.21.

Luxoft Holding Inc. (NYSE: LXFT), like other IT services stocks, typically displays multiple expansion when the macro outlook is stable or improving. The company provides software development services and IT solutions to multinational corporations, primarily in Western Europe and North America. The company offers software development services, including custom software development and support comprising application software development, software architecture design, performance engineering, optimization and testing. The UBS price objective for the stock is $38, and the consensus is at $37.77. Luxoft closed Thursday at $37.55.

NetApp Inc. (NASDAQ: NTAP) innovation strategy centers on flash-accelerated, cloud-integrated storage solutions for the broadest range of shared and dedicated infrastructure environments. By offering the broadest and most complete flash portfolio in the industry, NetApp maximizes the value of flash across the entire compute, network and storage stack, improving efficiency and accelerating business-critical application performance. Investors are paid a 1.5% dividend. The UBS price target for the stock is $50. The consensus price target for this top name to own in 2014 is $43.92. NetApp closed Thursday at $43.28.

The UBS research team sees macro demand and cloud computing as the two drivers this year. The macro influence could be a positive as their corporate surveys indicate some acceleration, which could mean decidedly more spending. The pullback in buying during the financial crisis has resulted in end-of-life issues with soaring maintenance costs, which could cause IT managers to upgrade hardware and software. This is the key for 2014 success for the top stocks to buy.

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