Top Tech Picks From a Hedge Fund Guru

Date: Monday, July 23, 2012
Author: Madeline Laskoski, CNBC.com

After reporting second-quarter earnings on Wednesday, technology bellwhether Intel cut its revenue forecast for 2012 amid slowing PC sales and a wavering global economy. Despite weak demand in the PC industry the tech sector is up for a second day.

In light of the news, Philippe Laffont, founder and portfolio manager of Coatue Management, offered investors his top picks in the sector, as well as stocks to avoid.

“The PC slowdown and Intel [INTC  25.52    -0.54  (-2.07%)   ] has to do with the shift away from the PC toward the smartphone and tablets,” Laffont told CNBC’s “Squawk Box.” He explained that this transition is the reason behind Hewlett-Packard’s [HPQ  18.605    -0.49  (-2.57%)   ] decline.

Jim Chanos of Kynikos Associates recently made a call to short HP because it is in a declining industry. While Laffont and Chanos do not always see eye to eye, they agree that HP will likely continue to struggle.

Laffont compared HP to Eastman Kodak, saying it is in danger of building technology that will lose relevance five years out.

HP’s two main businesses are PCs and printers. Laffont is not confident that these products can effectively compete with less-clunky, mobile tech products such as tablets.

“I think their business has secular headways,” Laffont said, adding that value investing is very difficult in technology. Laffont’s top tech picks include Amazon.com, Google, and Apple.

Laffont's Top Tech Stocks

AMZN

228.29

2.12

+0.94%

3,932,812

AAPL

604.30

-10.02

-1.63%

13,442,667

GOOG

610.82

17.76

+2.99%

6,235,682

Laffont said that tech stocks in general do well because they are cheap and tend to be promising performers in a tough macro environment.

“People will continue to buy smartphones and tablets, even in a difficult economy,” he said.

Laffont placed particular emphasis on Apple, explaining, “Sometimes the best stocks are the most obvious.”

Forecasting future Apple earnings, Laffont said, “We think earnings can get to $200 per share five years out.” At $200 a share, Laffont is projecting that Apple’s market cap , currently near $575 billion, will reach $1 trillion in five years.

 

 

Laffont’s confidence in Apple is based on two assumptions. The first stems from its mobile growth opportunities. Out of two billion cellphones, Apple is selling 150 million smartphones. He believes Apple could easily triple or quadruple that number over the next five years.

Second, Laffont is anticipating that investors will question Apple’s ability to reach a market cap of $1 trillion and sell. As a result, Apple will buy back shares.

“You can counter the size of your market cap by buying shares back,” Laffont said. “So our hope is that the company will buy a lot of stock back, which will make the stock price go up a lot without the market cap expanding.”

Among other tech stocks, Laffont has a wary eye on Facebook [FB  28.76    -0.24  (-0.83%)   ] and Yahoo [YHOO  15.915    0.19  (+1.21%)   ].

Laffont said Facebook is controversial, noting that it was built before the debut of smartphones.

“It is a company that is sort of PC-based,” he said, adding that social networking has become a casual encounter better positioned for a mobile platform.

Laffont cited Facebook’s acquisition of Instagram as a smart move because it will help Facebook integrate on mobile, but he said the purchase was also a sign of weakness: “I don’t think it’s going to be so easy for Facebook.”

As for Yahoo, Laffont said the decision to appoint Marissa Mayer as CEO was an “unbelievable coup from the board. I think these new elements of the board have really paid off.” Laffont said time will tell if Mayer can turn the business around.