Vijay Bhagavath expects these five stocks to outperform major indices

Networking and communications companies may not be the first stocks that come to mind when investors think of “hot” technology stocks, but opportunities arise as these companies capitalize on the booming trends in cloud computing, Wireless communication, big data and the Internet of Things.

Deutsche Bank equity analyst Vijay Bhagavath named five telecom and networking stock winners in a note to clients on Monday.Bhagavath expects these stocks to outperform major indices over the next one to two years, he wrote in the June 13 note.

“The core insight underlying our rerating call on CSCO is the accelerating transition we note from ‘Box’ to ‘Systems,’ based on a secular shift to Software and Recurring Revenues,” he wrote Monday. “CSCO’s gross margin inflecting to mid-60s and low-to-mid-30s operating margin, albeit at below consensus topline (due to the Software/SaaS mix shift), is the key to rerating the multiple in FY17/18.”

Bhagavath has a price target of $35 on Cisco. He expects the stock to trade at a price-to-earnings ratio of approximately 13 based on 2017 earnings estimates (and closer to where Oracle (ORCL) is trading), he said.

“The core insight underlying our rerating call on CSCO is the accelerating transition we note from ‘Box’ to ‘Systems,’ based on a secular shift to Software and Recurring Revenues,” he wrote Monday. “CSCO’s gross margin inflecting to mid-60s and low-to-mid-30s operating margin, albeit at below consensus topline (due to the Software/SaaS mix shift), is the key to rerating the multiple in FY17/18.”

Bhagavath has a price target of $35 on Cisco. He expects the stock to trade at a price-to-earnings ratio of approximately 13 based on 2017 earnings estimates (and closer to where Oracle (ORCL) is trading), he said.

Bhagavath has a price target of $36 on CommScope, which implies a 20% stock outperformance.

“ACIA is thematically ‘disrupting’ the status quo optical component value chain by introducing Moore’s Law economics in Optical Networking. ACIA is our Top Idea on double-digit growth trends in 100G+ Optical rollouts at Web 2.0s and Telcos (+$3B opportunity for ACIA; +30% CAGR).”

 Bhagavath has a price target of $50 on Acacia Communications.
 The company does not pay a dividend.