7 Big Tech Winners Of 2011

The following is a list of seven technology stocks which have gained significantly in 2011, versus the essentially flat NASDAQ composite index.

Ticker	Company	YTD Gains
AAPL	Apple Inc.	25.03%
IBM	International Business Machines Corp.	25.89%
INTC	Intel Corp.	16.01%
MSI	Motorola Solutions, Inc.	28.63%
ARMH	ARM Holdings Plc.	30.60%
NUAN	Nuance Communications, Inc.	41.42%
NVLS	Novellus Systems, Inc.	27.23%

I expect Intel, Apple (AAPL) and IBM to continue outperforming going forward. However, one stock which has become overvalued after its 2011 outperformance is ARM Holdings (ARMH), and I expect it to underperform going forward.

ARM Holdings designs microprocessors, physical intellectual property (IP) and related technology and software, and sells development tools. The company serves fabless mobile, consumer, and auto / industrial markets. ARM looks expensive trading at over 40x forward earnings. Its royalty per chip has declined at ~7.6% annually, as its mix has shifted to lower value non-mobile products. This declining trend is expected to continue going forward, with growth in lower value embedded products and smartphone mix shifting towards price sensitive emerging markets. There is a good likelihood that ARM's premium valuation will come under pressure as growth decelerates.

Intel (INTC) is a good long candidate in the Semiconductor space. It positively surprised The Street last quarter, despite macro headwinds and sluggish industry PC unit growth. According to Gartner, global PC shipments grew 3.2% in Q3. Intel's 19% revenue growth clearly represents a significant outperformance. The primary drivers were 10-12% higher chip prices from feature additions (graphics) and superior competitive position.

I believe current year and next year consensus sell side estimates for Intel are likely to prove conservative given its strong product execution (for example: Sandy Bridge), pricing, and secular growth in servers. Trading at 10.21x forward earnings, the stock does not look expensive and there is a good chance of multiple expansion. A 3.5% dividend yield is an added benefit for investors looking to buy the stock.

I like Apple, despite last quarter's earnings miss, which was largely due to customers holding back on new iPhone purchases before the iPhone 4S launch in October. iPhone 4S is currently seeing very strong demand, with over 4 million units sold in just three days after the launch in early October. Earnings calls of AT&T (T),Verizon (VZ) and Sprint (S) have also indicated strong trends for iPhone 4S. The carriers have witnessed a slowdown in sales of Android and BlackBerry phones, in addition to iPhone sales, from Q2 to Q3. There is a good chance that a number of Android / BlackBerry customers also waited to switch to the iPhone 4S in October, and that's why they delayed purchases.

Going forward, Apple will likely continue to see strong near term demand, on the back of holiday sales and anticipated iPad3 and iPhone5 launches next year. From a medium- to long-term perspective, Apple's secular growth and market share gains in the smartphone and tablet space is likely to continue for the next several years. Apple's strategy of customer-centric innovation and launching products with potential to create whole new markets is still intact. If one goes by Steve Job's biography, Apple TV is likely the next such product in the line. At a valuation of just 8.25x forward earnings (adjusted for cash), Apple is trading at very attractive levels. I believe it is a good opportunity to go long the stock.

IBM is another good long candidate. IBM's stock has been a consistent performer in the past few years, outperforming S&P 500 in 5 of the past 6 years. I like the defensive nature of the business, given that its high visibility annuity business accounts for more than 50% of revenue and 70% of profits which will support the company during downturn. Trading at around 13x forward earnings, the stock does not look pricey.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.