3 Tech Stocks Immune To A Potential Tech Bubble

By StreetAuthority | Updated August 26, 2014 AAA

If I ever truly need to find out what's going on with mobile computing and telecom, I check my kids' phones.

Both bypassed Facebook altogether and went straight to Instagram. Their interest waned in Instagram about the time Facebook bought the firm for $1 billion.

Now their attention has turned to Snapchat. This app company has yet to turn a profit but is valued by some experts, according to a Bloomberg report, at $10 billion or better.

I'm sorry. That's insane. I remember Pets.com.

Yes, the way these apps enable us to communicate is nothing short of the Jetsons. But when a company does not make money, it ostensibly adds zero value to its industry and the broader economy.

However, many firms in the tech industry should be approached from a different perspective. While the market obsesses on high valuations for companies that have yet to go public, real value is derived from a solid operating history, earnings growth and generous dividend yields. The following is a list of companies that are well-positioned to withstand any potential tech bubble.

Pitney Bowes, Inc. (NYSE:PBI)

While often viewed as a dying dinosaur in the postal service industry, Pitney is proving that there's more to the company than just snail mail meters.

Since 2007, the company has spent over half a billion dollars acquiring small and medium sized software companies. In 2010, Pitney made its most crucial acquisition when it bought Portrait Software PLC for $65 million. With Portrait’s help, Pitney has enhanced its geolocation application software, which was already used by social media giants such as Facebook.

Portrait's software and digital commerce unit contributes 15% to Pitney's annual revenue of nearly $4 billion.

Pitney saw the writing on the wall for the paper mail business and wisely changed course. Now, they are leveraging their brand and expertise at building distribution systems adapted to the transition of regular mail to e-mail.

Earnings per share are expected to grow at a 24% rate going into 2015. Estimates call for EPS of $1.86 for 2014 followed by a nice bump to $2.06 for 2015. Shares trade around $26 with a forward PE of 14 and dividend yield of 2.8%. I've profiled Pitney before.

Verizon Communications, Inc. (NYSE:VZ)

When you compare Verizon to its archrival AT&T (NYSE:T), AT&T is clearly larger. However, Verizon has consistently demonstrated better growth. A side by side comparison of average annual metrics makes the growth disparity glaringly obvious.

VZ T
5yr EPS Growth 42% 12%
5yr Revenue Growth 2% 1%
5yr Dividend Growth 2.50% 1.95%

In February 2014, Verizon bought out Vodafone Plc's 45% stake in Verizon, giving it complete control.. Management aims to add market share through a robust new 4G network and service plans that don't limit data usage and other key smartphone features. The company expects these moves to help them continue to gain traction in its highly competitive market.

As tablets proliferate further and smartphones get smarter, Verizon's trend of steady growth should continue. Shares currently trade at around $49 with a forward PE of just 13.8. The 4.3% dividend yield is also attractive. Look at it this way: Verizon is a high growth, high tech company whose stock trades like an old boring utility company.

Broadcom Corp (Nasdaq:BRCM)

Since its birth in 1991, Broadcom has seen the industry it serves -- wired and wireless telecommunications -- grow faster than the speed of light.

Their core competency is microchips that enable combined transmission of voice, data, video and other multimedia applications on a point to point basis in both devices and network infrastructure. In a nutshell, Broadcom plays a substantial role in pretty much everything you like to do with your tablet or smartphone.

Broadcom is on the forefront of the mobile revolution. Last year, 47% of the company's $8.3 billion in revenue came from mobile and wireless; 27% from broadband; and 25% from infrastructure and networking.

The company's healthy revenue history demonstrates the benefits of their strong foundation. Compounded annual growth over the last five years has averaged a strong 17%. Five year EPS growth is even more impressive clocking in at an annual average rate of 92%. The company is expected to turn in annual EPS of 2.85 this year, a 290% improvement from the same period last year. As mobile computing evolves through more advanced devices and cloud data storage, expect this trend to continue.

Broadcom's balance sheet is also rock solid with extremely low long term debt to capitalization of just 17%. Shares currently trade near $37.70 with a forward PE of 13.3 and a 1.27% dividend yield.

Risks to consider: As we learned 15 years ago, technology stocks are prone to bubbles and when bubbles burst, no one is spared, even high quality companies. However, solid balance sheets, steady earnings and dividends will always help combat volatility.

Action to take --> All three stocks represent a fast growing, rapidly changing sector with real and tangible earnings versus hyped up concepts of seemingly overvalued, unproven startups that are lumped into the mix. And while other, more seemingly relevant stocks related to mobile computing trade at nose bleed levels, these three names are more reasonably priced than an index fund. As a basket, they sport a forward PE of 13.7 which is an attractive 14% discount to the forward PE of 16 that the S&P 500 sports. With continued growth and an expansion of the basket PE to 18, the 12 to 18 month potential return would be in excess of 30% including the combined 2.8% dividend.

Note: Once in a blue moon a company comes out of nowhere and destroys its competition. My colleague Andy Obermueller compiled a report of "The 11 Hottest Investment Opportunities For 2015." To find out the name and ticker symbols of some of his game-changing ideas, click here.

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