Two Tech Plays Ready to Soar
Nothing’s failing in this market quite like success, and nothing is succeeding quite like failure.
Apple (NasdaqGS: AAPL), the most valuable and profitable company in the world, is also the single technically weakest stock in the Standard & Poor’s 500, according to the straightforward momentum indicators used by StockCharts Technical Rank.
Meanwhile, Computer Sciences (NYSE: CSC) and Symantec (NasdaqGS: SYMC) are two of the 10 hottest S&P 500 stocks by the same measure. Symantec and Computer Sciences have several things in common at the moment, but operational excellence isn’t one of them.
In fact, both are turnaround plays embarked on cost-cutting and empire-pruning drives under new and well-regarded CEOs. Only time will tell whether these bosses can justify recent investor optimism.
But they’ve really taken advantage of low expectations while Apple has struggled to top a bar set impossibly high.
Computer Sciences’ New Broom
Computer Sciences’ shares are up 60 percent since former IBM (NYSE: IBM) sales chief Mike Lawrie was named to replace the latest underachieving boss not quite a year ago. Although the stock popped 19 percent the day of the announcement, the rally began in earnest in August after Computer Sciences delivered promising results in Lawrie’s first full quarter at the helm.
Lawrie has pledged to cut $1 billion out of annual costs by the end of 2013. He has begun to unload non-core businesses, including the credit services unit recently sold to Equifax, an Italian IT services group and an Australian IT staffing subsidiary.
He’s also pulled no punches about Computer Sciences’ dismal recent record, which included a disastrous patient records contract with Britain’s National Health Services that had to be renegotiated and written off, as well as other projects Computer Sciences had lowballed, lost or mismanaged.
“Our results are very poor, and they are unacceptable,” Lawrie acknowledged in his very first earnings conference call. He’s since moved to tighten operational controls, so that managers are no longer blindsided by problems at far-flung units, like the recent accounting improprieties discovered in Denmark and Australia.
In addition to its own missteps, Computer Sciences has been coping with a slowdown in demand from key government customers in Europe and the US. Given all the negatives, investors appear to have decided that the 3 percent revenue dip in the October quarter wasn’t one of them.
Computer Sciences has no stronger backer than hedge fund manager David Einhorn of Greenlight Capital, who bought in after Lawrie took the top job.
“We believe that [Computer Sciences] has earnings power in excess of $4 per share and that…the company has significant opportunities for margin improvement, free cash flow conversion and capital deployment under the leadership of its well incentivized and shareholder-friendly management team,” Einhorn wrote in a recent letter to clients.
Pruning Bureaucracy at Symantec
As with Computer Sciences, security software maker Symantec has lots of internal bugs and a new CEO with a fancy corporate pedigree and a determination to root them out. Steve Bennett spent more than two decades at General Electric (NYSE: GE) before moving on to run Intuit (NasdaqGS: INTU).
He was Symantec’s chairman before claiming the CEO’s job from his predecessor in a boardroom coup in July. The challenges he’s confronting—a growth deficit and an overgrown corporate bureaucracy—are similar to those facing Computer Sciences, and he’s attacked them with the same alacrity.
Management layoffs are in the offing despite the recently posted upbeat results. “It’s hard to make decisions. It slows you down. There are too many people in meetings. …Our system doesn’t work,” Bennett told Reuters this week.
The stock is up 65 percent since he ousted his predecessor, and 15 percent so far this month. Some recently bullish analysts are waving caution flags, with Stifel Nicolaus and Wunderlich lowering their ratings yesterday from Buy to Hold on the assumption that the stock has outpaced the fundamentals. But Barclays, among others, continues to count on 15 percent upside from current levels.
The S&P 500 leadership group is chock-full of other turnaround projects, from life insurer Genworth (NYSE: GNW) and hospital operator Tenet Healthcare (NYSE: THC) to Whirlpool (NYSE: WHR) and Citigroup (NYSE: C).
Investors apparently believe it’s easier to fix a broken company than to sustain success as bright as Apple’s. In this environment of low interest rates and forgiving capital markets, they may even turn out to be right. Certainly, they’re not complaining about the returns Symantec and Computer Sciences have already delivered on that premise.
Igor Greenwald is managing editor of The Energy Strategist and an investment analyst with Investing Daily.