3 Tech Stocks to Outperform in Q2 - Analyst Blog

"All intelligent investing is value investing -- acquiring more than you are paying for. You must value the business in order to value the stock." - Charlie Munger

This famous quote from the investment partner of Warren Buffett is appropriate post the recent sell-off of Internet based technology momentum stocks. With the onset of the second quarter of 2014, investors have dumped favorites like Twitter TWTR, Groupon GRPN and Yelp YELP on increasing fundamental concerns.

The share price movement of momentum stocks often lacks justification and defies common sense. Their rise can be as meteoric as their fall from grace. The fundamentals of these stocks do not always support their lofty valuations. Nevertheless, short-term investors found them attractive for their high flying ability.

However, the recent sell-off that started from late March has put the focus back on value investing. Investors are suddenly taking a long position on value stocks in the market. Share price of stocks with established business fundamentals are expected to surge in the second quarter due to this renewed demand.

We also believe that momentum stocks that cater to growing sectors such as mobile, social networking and Big Data analytics will remain strong as fundamentals continue to improve.

Moreover, upcoming first quarter earnings results will be a key growth factor. Here are 3 stocks that can outperform the broader market in the second quarter of 2014:

Advanced Micro Devices AMD – This Zacks Rank #1 (Strong Buy) has delivered positive earnings surprises in the last four quarters with an average beat of 49.51%.

AMD's strategy of shifting focus from traditional growth areas (PCs) to high growth areas (semi-custom chips, professional graphics, dense servers, embedded and ultra low-power client) will drive growth in our view. The company's strong product portfolio, strength in graphics and continuing game console wins are major positives.

The upcoming launches of Jaguar (AMD's first 28 nm processor) for desktop PCs and Beema and Mullins for mobile are key growth catalysts for the second quarter. Strong sales of Apple's (AAPL) Mac Pro as well as higher Xbox One and PlayStation 4 sales will drive growth in the quarter.

Hewlett-Packard HPQ – This Zacks Rank #2 (Buy) has delivered positive earnings surprises in three of the last four quarters with an average beat of 3.29%.

Improving personal computing market trends and growing penetration in enterprise cloud services are expected to drive H-P's results. Additionally, H-P's restructuring plan is expected to yield approximately $1.1 billion in cost savings this year.

H-P intends to reinvest the majority of these savings into the business to foster innovation, particularly in cloud, Big Data analytics, and information management and security segments. Moreover, ample liquidity enabled H-P to increase its dividend payout by 10.2% in March this year.

H-P's plan to enter the 3D-printer market will be a key growth catalyst in our view. Per Gartner, worldwide shipments of 3D printers will jump 75% to 98,065 units in 2014, followed by a near doubling of unit shipments in 2015.

Facebook FB – This Zacks Rank #2 (Buy) has delivered positive earnings surprises in three of the last four quarters with an average beat of 20.74%.

Facebook's growing mobile user base, Instagram's increasing popularity (200 million users), new initiatives such as Internet.org and the WhatsApp acquisition are the major growth drivers in the near term.

Per eMarketer, Facebook is expected to significantly benefit from growing mobile ad spending globally, which is expected to increase 75.1% year over year to $31.45 billion in 2014. Facebook's ad market share is expected to increase from 17.5% in 2013 to 21.7% in 2014.

Conclusion

As the momentum stock rally fizzles out, we believe that investors in search of undervalued stocks with improving fundamentals will increase in the remainder of 2014.