Tech biggies are expected to repatriate a large chunk of oversees cash now that President Trump signed the GOP tax plan into law. The question that looms large now is what will the tech players do with the cash?
According to market research firm GBH Insights, roughly 90% of the cash that was taken home was utilized for dividend payments and share repurchases in the tax holiday that last occurred in 2004. But now, GBH Insights expects the firms to allocate 70% of the repatriated cash for capital returns. The market research unit specifically expects Apple Inc. (AAPL - Free Report) shareholders to witness another dividend hike in 2018.
Higher stock buybacks are expected to further drive the share price of tech players. Moreover, a significant portion of the cash will likely be allocated for research and development and for mergers and acquisitions. This is expected to brighten the prospects for tech stocks in 2018 and beyond.
2017: A Banner Year for Tech
Tech companies had a stellar run for almost the entire of 2017. During the year, the tech-laden Nasdaq Composite Index rallied more than 28%, outperforming the S&P 500’s 19.8% gain. The market also saw an outperformance by the FAANG stocks.
The FAANG word is an acronym where "F" stands for Facebook, Inc. (FB - Free Report) , "A" for Apple, the third letter "A" for Amazon.com, Inc. (AMZN - Free Report) , "N" for Netflix, Inc. (NFLX - Free Report) and finally "G" for Alphabet Inc. (GOOGL - Free Report) , commonly referred to as Google. Each of these stocks rose 53.4%, 46.1%, 55.9%, 55% and 32.9%, respectively, last year.
Improving Free Cash Flow
The technology sector — as represented by the Zacks Computer & Technology Sector — gained significant financial strength. As of Sep 30, 2017, the sector had $20.9 billion in cash which could alone take care of major proportion of its long-term debt, recorded at $23.8 billion. Also, free cash flow jumped 33% in the third quarter, against 2.8% during the second quarter and a 22.6% quarterly decline in the first.
Positive Q4 Earnings Expectations
Technology is among the few sectors that are set to record strongest gains for fiscal fourth-quarter 2017. Per the latest Earnings Preview, the technology sector will likely see year-over-year earnings growth of 14% on 8.5% higher revenues.
2018 Looks Rewarding for Tech Investors
FAANG stocks started 2018 on a bullish note. Year to date, Facebook, Apple, Amazon, Netflix and Alphabet have gained a respective 6.5%, 2.8%, 7.1%, 8.9% and 5.7%, maintaining last year’s momentum.
Netflix is looking to capture the international market and is planning to make a massive investment in original production. CNBC added that strong foothold in the international market could reward Netflix with significant cash flow.
Meanwhile, Facebook has been increasing safety and security for users on the platform ever since the Russian ad fiasco came into light. Facebook is spending on original content and the growing user base will likely offset the company’s rising costs pertaining to security and safety.
While the leading tech players are coming up with strategies to gain strong foothold, Trump’s tax reform will likely be a prime factor in boosting tech stocks. The lowered corporate tax rate will be implemented this year instead of 2019.
Big tech companies are likely on track to bring substantial oversees cash back to the United States as the Trump administration is imposing a mandatory repatriation tax of 15.5% on cash and liquid assets against the prior mark of 35%, per GBH Insights.
GBH Insights estimated that big technology firms have parked as much as $550 billion to $600 billion overseas. Per the market research firm, 2018 will witness the repatriation of $300 billion to $400 billion — comprising Apple’s $200 billion —by technology players.
Around 70% of the cash repatriated will likely be utilized for capital returns, which may include dividend payments and share repurchases, according to GBH Insights. The remaining 30% will likely be allocated for activities like research & development and mergers & acquisitions.
Time to Focus on Tech Stocks
We have employed the free cash flow yield ratio to show that the sector is extremely lucrative from a investment perspective. Companies or sectors with strong operations generally have high free cash flow yield, indicating that the amount of money investors are generating is more than the amount spent to buy the stock. Our proprietary model shows that free cash flow yield for the Zacks Computer & Technology Sector stands at 5.1%, way higher than 3.7% for the S&P 500.
Picking technology stocks seems to be a smart option at this moment. However, picking winning stocks may be a daunting task.
This is where our VGM Score comes in handy. Here, V stands for Value, G for Growth, and M for Momentum, and the score is a weighted combination of these scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a solid Zacks Rank and VGM Score.
Headquartered in Boise, ID, Micron Technology, Inc. MU has established itself as one of the leading worldwide providers of semiconductor memory solutions.
With a VGM Score of A, the company is likely to witness year-over-year earnings growth of 98.2% in fiscal 2018. Also, Micron has surpassed the Zacks Consensus Estimate in each of the last four quarters with an average positive surprise of 10.2%.
Presently, the company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Avid Technology, Inc. (AVID - Free Report) , headquartered in Burlington, MA, is a leading developer of software and hardware.
Over the last 60 days, the Zacks Consensus Estimate for 2018 earnings has been revised upward. The company carries a Zacks Rank #2 (Buy) and has a VGM Score of A.
Headquartered in India, Infosys Limited (INFY - Free Report) offers customers the chance to outsource several process-intensive functions related to Customer Relationship Management, Finance and Accounting, and Administration and Sales Order Processing.
For fiscal 2018, we expect the firm to witness year-over-year earnings of 5.3%. This Zacks #2 Ranked player currently has a VGM Score of A.
Seagate Technology plc (STX - Free Report) , headquartered in Dublin, Ireland, is the second-largest manufacturer of hard disk drives (HDDs) in the United States.
For fiscal 2018 earnings, the Zacks Consensus Estimate has been revised upward over the last 60 days. The company carries a Zacks Rank #2 and has a VGM Score of A.
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