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13 Tech Stocks to Buy and 6 to Avoid in 2012

Salesforce.com and Qualcomm are the technology stocks to buy for 2012, Canaccord Genuity analysts say, while Netflix and Research In Motion are to be avoided.

Canaccord Genuity, the capital-markets division of investment bank Canaccord Financial , was founded in Canada as a venture-capital firm in 1950, and has since expanded operations into the U.S., the U.K., China, and Australia.

The firm's wealth management unit had more than $14 billion (Canadian) in assets under administration as of Sept. 30.

After a year in which global trends drove stock correlations to record highs, the Canaccord Genuity technology team says 2012 may be a year in which "favorable returns are the reward for superior fundamental analysis."

Technology as a whole has performed only slightly better than the overall market this year.

The Standard & Poor's 500 Index of the largest U.S. companies is down 2.2 percent through Friday's close, compared to a 1.9 percent decline on the Technology SPDR ETF and a 1 percent dip on the iShares Dow Jones U.S. Technology ETF.

Through Dec. 15, technology was the fifth-best performer of the S&P 500's 10 sectors, trailing defensive categories like utilities, health care and consumer staples. But not all technology stocks are created equal.

Shares of Apple are up 18 percent this year and Intel has climbed 10.5 percent.

Meanwhile, Netflix has tumbled 60 percent and even tech giant Cisco Systems has dropped 11 percent.

Despite uneven returns for the sector, Canaccord's tech team is bullish, while signaling caution on PC growth trends and supply constraints. Canaccord analysts say trends are most favorable in mobile, Cloud-based service and new media.

"Our top picks focus incrementally on product cycle stories and businesses that are well-positioned to be the beneficiaries of established growth trends," the group of analysts wrote in a research note released Friday.

Semiconductors

Canaccord's Picks: Analog Devices, which makes digital signal processing integrated circuits , and Integrated Device Technology, which makes a range of semiconductor products.

Analyst Bobby Burleson says that, entering 2012, investors need to understand how constrained PC growth could be because of an inventory correction, lackluster end demand, and the disk drive shortage following the floods in Thailand.

"While we remain concerned about near-term softness in PCs and communications and acknowledge the potential for another number cut, we believe the worst cuts are behind us," Burleson writes. "Heading into 2012, we like names with broad-end market exposure and low PC exposure."

Burleson picks Analog Devices because of the potential for more dividend increases. As a bonus, the company has virtually no PC exposure, he says.

Similarly, Integrated Device also has limited PC exposure and Burleson expects the company gross margins to rebound in 2012 as the company completes its transition to a fabless model.

Communications Technology

Canaccord's Picks: Consumer-electronic gadget maker Apple , chipmaker Qualcomm , and wireless computer modem maker Sierra Wireless.

Analyst T. Michael Walkley argues that with wireless carriers like Verizon and AT&T upgrading their networks from 3G to the faster 4G LTE speed, smartphones enabled to run on the faster networks will increase in the sales mix.

Walkley expects the sales of LTE mobile computing products will increase as well.

"While we anticipate global handset units will increase by 7 percent year over year in 2012 to 1.72 billion units, we anticipate much faster growth trends for the smartphone market. In fact, we are modeling 481 million smartphone units in 2011 ramping to 650 million units in 2012, or 35% year-over-year growth."

Walkley picks Apple and Qualcomm as his top large-cap tech stocks for 2012.

Apple gets the nod because of its dominate profit share of the smartphone and tablet markets, and he selects Qualcomm because its wireless chips lead over those of original equipment manufacturers, or OEMs.

Walkley also selects Sierra Wireless as his best small-cap tech pick for 2012 because the company "is well positioned to benefit through increased USB dongle, mobile hotspot, and embedded laptop connectivity sales, particularly with AT&T in 2012."

New Media & Location Technology

Canaccord's Picks: Trimble Navigation, which produces positioning products for agriculture and construction markets, and mobile marketing and advertising company Velti.

For new media, Canaccord picks Internet video asset management solutions provider KIT Digital and digital home entertainment technology company Rovi Corp.

Analyst Jeff Rath says that contrary to initial beliefs about the viability of traditional pay-TV providers' survival chances in the video-on-demand market, he believes that it is these so-called "new media" companies that will actually be the winners. Rath expects that their offerings will start to gain traction around 2013.

"We fully expect the U.S. pay-TV service provider eco-system to undergo an accelerating change as cable providers roll out more robust OTT/Hybrid video offerings in response to growing competitive pressures, and in an attempt to stem ongoing losses of its core video subscribers."

His new media stock picks are KIT Digital , which he says is "very well-positioned to benefit from the accelerating market dynamics," which have resulted from Netflix's international expansion as well as the services offered on platforms like Microsoft's Xbox 360.

Rath also likes Rovi in the space because of its numerous growth opportunities in the over-the-top new media market.

Rath is also the analyst covering location technology, and he picks Trimble Navigation and Velti .

For Trimble he expects that key markets like agriculture will help the company benefit from a strong cyclical recovery. For Velti, Rath says that macro-economic concerns have made the stock oversold and that recent industry changes have a less negative impact on the stock than the market implies.

Enterprise Software

Canaccord's Picks: Enterprise Cloud-computing company Salesforce.com and language software maker Nuance Communications.

Analyst Richard Davis says that the reason to buy the stocks of software companies with fundamental momentum is that software, unlike the vast majority of industries, "has very high incremental margins and modest capital spending to support growth."

"Software companies — at least firms with next generation architectures — are in great shape," Davis writes. "Cloud software accounts for less than 10% of installed code. Barring horrific economic headwinds, the 'revolutionaries' on which we focus our coverage are very likely to gain market share at the expense of legacy competitors."

Davis picks Salesforce.com and Nuance because they are both segment leaders, in the midst of a product upgrade cycle, and have a visible path to higher cash flow.

"In our experience, companies with these dynamics tend to produce upside quarterly results on various metrics, multiple expansions and superior stock price appreciation," Davis writes. "Our two favorite stocks have each of these characteristics."

Internet

Canaccord's Picks: Internet search giant Google and online real estate destination Zillow.

Analyst Michael Graham says that relative to historical levels, U.S. Internet stocks appear to be attractively valued, even though there is a widening gap between the revenue growth profiles of those stocks versus the much broader S&P 500.

"Looking ahead at 2012, we believe growth prospects for our sector look attractive and there is a strong likelihood that stocks in our universe will deliver robust revenue growth relative to other sectors," Graham writes. "We believe the underlying drivers will be growth in online advertising, eCommerce, mobile commerce, and social networking adoption."

Graham says that Google still offers stable exposure to the most durable trends in tech, which are Internet usage, online advertising and commerce, smart phone penetration, mobile commerce, and social networking.

"We expect strong growth and profitability, and believe this will warrant a stable or higher multiple, especially if mobile monetization improves," he writes.

Meanwhile, Graham picks Zillow for several reasons. The first is that Zillow is penetrating the online real estate market with quickness, and he expects rapid growth and significant operating leverage.

Graham also argues that Zillow could be an attractive acquisition target for a company that has little real estate experience.

Tech Stocks to Avoid

Canaccord analysts say there are six tech stocks they will avoid next year. Here are the companies and the reasons why.

Intel : "Intel lowered guidance for the fourth quarter on HDD supply disruption," writes analyst Bobby Burleson.

"While we acknowledge supply disruption to be severe and likely to worsen in Q1, we see additional negative issues with demand softening for motherboard makers and [original design manufacturers] while component inventories build downstream."

LM Ericsson: "While Ericsson reiterated its 2010 to 2013 revenue and operating income [compound annual growth rate] targets of 4 percent to 10 percent and 5 percent to 15 percent, respectively, management discussed its expectations for continued gross margin pressure over the next several quarters due to sales mix and macro headwinds," writes analyst T. Michael Walkley.

Research In Motion: "Consistent with our checks indicating slowing BlackBerry 7 sales post the iPhone 4S launch in October, RIM guided fourth-quarter and full-year 2012 sales and earnings well below consensus," Walkley writes.

Powerwave Technologies : "Powerwave reported second-quarter results in line with our estimates post its recent pre-announcement with weakening sales in all regions," Walkley writes.

"Due to a significant slowdown in spending by North American network operators, a significant reduction in orders from [original equipment manufacturers], and weakness in the Western Europe, Eastern Europe, and Middle East markets, sales declined 55 percent sequentially and visibility remains limited."

Netflix: "While the macro environment appears positive for NFLX, we believe that the company faces numerous challenges, including subscriber losses, rising content costs and an increased competitive landscape," analyst Jeff Rath writes.

Intuit: "Intuit is a very well-run and -positioned firm," analyst Richard Davis writes.

"We simply would like to buy the stock a few multiple points cheaper in order to compensate for the risk that the SMB market stays in the dumps longer than expected."

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