Tech powerhouse

Let’s start with Microsoft (NASDAQ: MSFT), which was down 5.5% yesterday. It’s one of the world’s largest technology companies.

Microsoft is one of the first shares I’d buy if I was building a portfolio from scratch today. That’s because it offers both growth and defence.

On the growth side, the company has exposure to several high-growth industries including cloud computing, the metaverse, and video gaming. So, it’s well placed to increase its revenues and profits in the years ahead.

On the defensive side, many of its products are essential for businesses today. So revenues should hold up if economic conditions deteriorate.

Of course, there are risks to consider. If tech stocks continue to fall, returns could be disappointing.

However, with the stock now trading on a P/E ratio of 25, I like the long-term risk/reward skew here.

Brand power

Next up, athletic footwear and apparel giant Nike (NYSE: NKE), which declined 5.9% yesterday.

Nike has experienced some supply chain and cost challenges recently. And these issues may persist in the short term. However, given that the stock has fallen from around $180 in November to $106 today, I think a lot of the risk is now largely factored into the share price.

When these short-term challenges do subside, Nike should be well placed to grow its sales and profits. Not only is it likely to benefit from its shift to selling direct-to-consumer, but it’s also likely to benefit from the ‘casualisation’ fashion trend, which is showing no signs of slowing down.

Nike shares currently sport a forward-looking P/E ratio of about 28. That does look high at face value. However, given the company’s incredible brand power, I’m comfortable with the higher valuation.

Growth potential

Finally, I’d also buy shares in Lam Research (NASDAQ: LRCX), which fell 5.6% yesterday. It makes semiconductor manufacturing equipment.

This is a stock I’m quite excited about. In the years ahead, many countries are planning to build semiconductor manufacturing plants on home soil in an effort to avoid chip shortages. The US is one such country that’s set to increase domestic manufacturing significantly. Recently, it announced $53bn in government funding to get the ball rolling.

This ‘reshoring’ of semiconductor manufacturing should provide a huge boost for Lam as its technology is crucial for chip manufacturers. So, the future here looks very bright, to my mind.

It’s worth pointing out that the semiconductor sector, as a whole, is experiencing weakness now. This could persist for a few more quarters and potentially have a negative impact on this stock.

However, in the long run, I expect Lam Research to do well. With the stock trading at just 11 times this year’s forecast earnings, I see it as a bargain.

I already have a small holding in Lam as I’m quite bullish on the long-term growth story. Is now a good time to buy more stock for my portfolio? Let’s discuss.

At the heart of a powerful megatrend

While investors seem to have lost interest in technology shares this year, the long-term growth story here is still very much intact, to my mind.

Semiconductors, or ‘chips’, are a very important part of the global economy. Today, they power almost all electronic devices including smartphones, computers, kitchen appliances, and electric vehicles. As the world becomes even more digitalised in the years ahead, demand for chips should rise.

But here’s the real kicker. Over the next decade, we’re likely to see countries all over the world build semiconductor plants domestically in an effort to minimise supply chain disruption (around 90% of advanced semiconductors are manufactured in Taiwan today).

This kind of activity should provide a huge boost for Lam Research as its innovative wafer fabrication equipment plays a crucial role in the chip manufacturing process. In fact, Lam says that today, nearly every advanced chip is built with its technology. So the future looks very exciting, to my mind.

I’ll point out that Wall Street analysts expect revenue growth of 15% for the year ending 27 June and 16% for the following year.

Bargain valuation

After the recent share price fall, the stock now looks cheap. With analysts forecasting earnings per share of $38 for the year ending 27 June 2023, the P/E ratio here is just 12.5. That’s an attractive valuation, in my view.

One person who clearly sees some value at current levels is board member Catherine Lego. Recently, she spent about $800,000 on Lam Research stock. It’s worth noting that Lego – who joined the board in 2006 – has considerable experience in the semiconductor investing space. Previously, she was a general partner at Oak Investment Partners, focused on the semiconductor industry. I see her $800k buy as very encouraging.

Additionally, the company recently authorised a $5bn share repurchase. This suggests management thinks the stock is cheap too.

Risks

Now I need to point out that, like many other companies, Lam is experiencing some supply chain and cost challenges right now. These issues are impacting profitability.

For the quarter ended 27 March, operating income as a percentage of revenue was 29.4%. In Q1 2021, it was 31.6%. The company described the supply environment as “extraordinarily difficult”.

These challenges could persist for a while so this is a risk to be aware of.

However, the good news is that management was confident in the long-term growth story: “We remain confident in the secular drivers of wafer fabrication equipment investment as well as Lam’s leadership position and expect to return to solid growth as industry constraints ease,” said president and CEO Tim Archer.

Lam Research: my view now

In light of all of the above, I’d be happy to buy more Lam Research shares today. In my view, Lam is a high-quality company with a very bright future.

I think the recent weakness has provided me with a great buying opportunity.

Looking at stock market forecasts for 2022, the majority of analysts expect shares to keep rising this year. That said, the general consensus is that stock selection will be important if investors want to generate strong gains. Most experts do not expect the market, as a whole, to post the kind of gains it has produced in recent years.

Here, I’m going to highlight four shares I like for 2022. If I was looking to put new capital to work today, I’d be buying these four stocks for my portfolio.

‘Britain’s Warren Buffett’ just bought this stock

First up, Amazon (NASDAQ: AMZN), which is a major player in both e-commerce and cloud computing. It underperformed the other Big Tech stocks in 2021 and I think the share price weakness has created a buying opportunity. Sooner or later, I expect AMZN to play catch up.

There are a couple of reasons I’m bullish here. The first is that I expect Amazon to generate strong growth in its cloud computing division in the years ahead. The cloud market is forecast to grow at nearly 20% per year between now and 2028. This market growth should provide huge tailwinds for the company.

The second is that the valuation is now far more attractive than it used to be. Go back three or four years and Amazon had a price-to-earnings (P/E) ratio in the 200s. Today however, the forward-looking P/E ratio is about 65. Given Amazon’s dominance, I think that’s a reasonable valuation.

It’s worth noting that top portfolio manager Terry Smith (aka ‘Britain’s Warren Buffett’) just bought Amazon for Fundsmith Equity, so he clearly sees value in the stock.

But Amazon faced some challenges in 2021, including higher costs and supply chain issues. These issues could persist in the near term. However, eventually, I think they’re likely to go away as imbalances brought on by Covid-19 moderate. When they do, I expect Amazon’s share price to move higher.

A leader in digital payments 

Another stock I like for 2022 is PayPal (NASDAQ: PYPL). It’s one of the world’s leading ‘digital wallet’ companies. Currently, the company has over 400m users on its payments platform.

PayPal shares took a big hit in the final quarter of 2021. One reason for this was that 2022 revenue guidance was a little lower than the market had been expecting. I believe the share price weakness here has created a great buying opportunity. After the pullback, the P/E ratio is in the mid-30s, which seems very reasonable to me given the growth potential here as the world moves away from cash.

It looks set to be a major beneficiary of the continued growth of online shopping in the years ahead. Research shows that when merchants offer PayPal as a checkout option, consumers are around three times more likely to complete their sale. With e-commerce set to grow by around 10% per year over the next decade, PayPal looks set to get much bigger. 

Of course, PayPal does face plenty of competition. Not only from traditional rivals, such as the credit card companies, but it also faces competition from new payments technologies such as crypto. So there’s no guarantee it will do well.

With 400m+ users however, I think it’s well-positioned for the future.

Low valuation 

In the FTSE 100, I like Sage (LSE: SGE). It’s a leading provider of cloud-based accounting and payroll solutions that’s benefitting as businesses undergo digital transformation.

In recent years, Sage has been transitioning to a subscription-based business model and this now appears to be paying off. Recently, the company advised that for the year ending 30 September 2022, it expects recurring revenue growth in the region of 8-9%. It added that organic operating margin is expected to “trend upwards” in FY2022 and beyond.

“The Group enters FY22 in a strong position and with momentum,” said chair Andrew Duff.

I’m not convinced this shift to a software-as-a-service (Saas) business model is fully reflected in the valuation however. Currently, Sage shares have a P/E ratio in the low 30s. By contrast, US rival Intuit has a P/E ratio in the mid-50s. I think we could see the valuation gap here close in 2022. It’s worth noting that Sage has been buying back shares recently, so this should boost earnings per share.

One risk to consider here is competition from newer players, such as Xero. These kinds of companies could steal market share. But I think this risk is baked into the valuation.

Important technology 

Finally, I like Lam Research (NASDAQ: LRCX). It’s a maker of semiconductor manufacturing equipment. Over the last few decades, these have become a very important part of the global economy. Today, they essentially power all electronic products, including computers, smartphones, kitchen appliances, and electric vehicles.

The reason I’m bullish on Lam is that I expect to see countries all over the world build domestic semiconductor plants in the years ahead in an effort to minimise supply chain disruption. This should benefit Lam and other makers, such as ASML.

Lam strikes me as a high-quality company. Over the last five years, revenue has climbed from $5.9bn to $14.6bn. Meanwhile, over this period, return on capital employed (ROCE) has averaged 28%, which shows the company is very profitable. I don’t think the quality here is reflected in the valuation however. Currently, Lam trades at just 20 times expected FY2022 earnings. That seems very cheap to me.

A risk to be aware of is that semiconductor spending tends to be cyclical. So the company could face a downturn at some stage. I’m comfortable with this risk however. I don’t expect a downturn in the near term, simply because, with the world increasingly becoming more digital, demand for semiconductors is very high at the moment.