With the certainty of American Recovery and Reinvestment Act stimulus dollars increasing demand for health care IT products, the biggest question mark currently facing the industry is how will management teams ride out the rising tide that lifts all boats?

“Half of the game is the demand itself, and nurturing and driving sales. And the other half of the game is preparing the infrastructure and organization to deal with that demand,” said Leo Carpio, senior analyst at Caris & Company.

Now that the industry’s former hockey-stick growth scenario has pared down to a more somber and tempered ramp-up, health care IT management teams must walk a fine line between building up capacity and investor expectations, and preparing for a more conservative demand growth curve.

“In terms of very good management teams, the ones I would highlight again would be Eclipsys (ECLP). Their management team has been very focused on the opportunities with a very conservative viewpoint, and it’s a seasoned management team,” Carpio said. “I think the way they are approaching the issue in terms of resources, and the wealth and organization strength seems to be the right way.”

Carpio also points to Allscripts-Misys Healthcare Solutions (MDRX) as another company that’s targeted its focus on long-term opportunities.

“They have been very good at tempering expectations, building a recurring revenue base, good cash flow and creating visibility for earnings,” he said. “So they are taking the right approach also in preparation.”

In this excerpt of TWST’s interview with Joseph Gladue, senior equity research analyst at B. Riley & Co., Gladue discusses his coverage of California-based ethnic-oriented banks, comparing their performance to that of peers within the Western and Pacific banking sector.

TWST: You mentioned the ethnic-oriented banks. How have they performed in comparison to conventional banks?
Mr. Gladue: Chinese banks were some of the banks that were harder hit by the troubles in residential construction. East West Bank (EWBC) had a lot of problems in that area, as did their biggest rival, UCBH (UCBH.PK). Of course, UCBH was taken over by the regulators, and ultimately most of their operations were sold to East West Bank. East West has been pretty aggressive on writing off their problem loans, and they benefited from the FDIC-assisted transaction of UCBH. That transaction is probably the poster child for the benefits of doing an FDIC-assisted deal. East West had some big gains from accounting for that transaction, and it looks like it is going to be pretty accretive to East West’s operations going forward. Cathay Bancorp (CATY), the other big Chinese-oriented bank, didn’t have quite as big a problem with construction lending as East West or UCBH did, but they still ran into some problems with asset quality as well. Both East West and Cathay have done some capital raises; they seem to be relatively healthy on the capital front now.

There are really four large Korean banks. The largest in terms of assets is Hanmi (HAFC). Hanmi is a little bit different than the other three. They’re less focused on commercial real estate lending and had a bigger exposure to C&I lending, but they have had some big asset-quality issues, and they do need to raise capital. There have been some rumors in the papers, some emanating out of South Korea, that one of the big South Korean banks was interested in investing in Hanmi. That has not come to pass yet, but that rumor is still out there. The other three large Korean-American banks - Wilshire (WIBC), Nara (NARA) and Center Bank (CLFC) - all are more focused on commercial real estate. They’ve all had some growth in their non-performing assets, but the pain hasn’t been as bad in that segment so far, as it was in the residential area. All three of those banks seem to be able to raise capital from existing shareholders and from within the Korean-American community. There has been some speculation that if Hanmi doesn’t find outside investors, that Nara or Wilshire could end up being the ultimate acquirer of that bank, but that’s a little premature at this point.

Positive domestic data and gaping growth opportunity overseas may help electronic payments companies like Visa (V) and MasterCard (MC) beat expectations through 2010 and into 2011.

According to Signal Hill Capital Group Senior Analyst Mayank Tandon, emerging markets, particularly those in Latin America and Asia-Pacific, are the perfect playing grounds for companies that wish to latch on to increasing card penetration trends.

“Based on the industry data that we track, card penetration is about 3.5 cards per capita, for example, in the U.S., and it’s less than 0.5 in emerging markets, such as China and India,” Tandon said. “As we look forward, we expect card transactions, both credit, debit and prepaid, to grow at a low-double-digit rate worldwide, with Latin America and Asia Pacific leading the way with high-teens growth rates because of its very low penetration levels today.”

Domestic retail sales data also gives Tandon reason to be optimistic, with evidence of improving consumer spending and positive fourth-quarter retail sales figures emerging.

“While the jury is still out on whether the consumer will continue to spend, recent trends are encouraging,” said Tandon, adding that good news doesn’t mean the payments processing industry is out of the woods yet. Stalled or reverse consumer spending trends would force these companies to once again turn introspective and closely manage costs.

“These companies are already running pretty lean and mean, but at the same time, what they’ll have to do is manage operating expenses and also target those markets, the markets that we talked about, internationally that might offer better growth opportunities than the developed markets of the U.S. and Western Europe,” Tandon said. “But to reiterate, these companies did a very good job of managing expenses during the recession and therefore were able to grow earnings even in the face of very slow revenue growth or down revenue growth.”

Regardless of whether or not health care reform comes to pass in the U.S., or the form it takes should it pass, adoption of electronic health records will accelerate along with increased product demand for health care IT vendors.

“There is a little bit of perception out there that no health care reform is bad for hospitals and it’s bad for the health care IT vendors,” said Steve Halper, associate head of U.S. research at Thomas Weisel Partners. “This is an incorrect view, in our opinion. The reason why it’s not going to happen is because the ARRA incentives are in place, and they are independent of health care reform.”

While Halper predicts a rising-tide-lifts-all-boats scenario for the health care IT space, he believes those companies with the best product suites will benefit the most.

“We think that Cerner (CERN) and Epic are the top two companies in the space,” Halper said. “After that it would be Eclipsys (ECLP) and McKesson (MCK). And I think their product suites are competitive, but Cerner and Epic are probably growing faster.”

The analyst also emphasizes that much in the same way not all health care IT vendors are created equal, not all physicians are on the same path of EHR adoption.

“We are a little more cautious towards physician office software vendors,” Halper said. “The large groups will make these investments, but the smaller physician groups will probably drag their feet a little bit more and we might not see the acceleration in demand from that segment right away.”

Senior Analyst Tom Mitchell of Miller Tabak suggests a bleak forecast for Western bank investing, at least for the near future. Real estate problems cause the analyst particular concern, as an uncertain amount of expected loan risk may heavily influence this environment.

“I think that the key is that balance sheets, where commercial real estate represents 100% or 200% of shareholders’ capital, are going to be subject to inherent volatility in the next six to 12 months,” said Mitchell, cautioning investors who will buy regardless of trends. “So we think that investors who think they want to own banks should be prepared for that volatility and plan to hold the banks through it if they’re going to own them in the first place.”

Mitchell closely watches real estate value trends and the affects on such companies as Zions (ZION), City National (CYN) and Wells Fargo (WFC).

“We like to see high-loss reserves relative to non-performing assets and troubled debt restructurings; we like to see high levels of capital and some indication that increases in non-performing assets have leveled off, even though the non-performing assets are continuing to grow,” said Mitchell, who expects economic fits and starts, concentrating on areas that had the most overbought real estate conditions but are now recovering.

“So that doesn’t leave us with a whole lot of candidates out there,” he said. “That’s sort of where we tend to suggest people focus at the moment because we don’t think it’s clear sailing ahead.”

However bumpy the road may get, Mitchell predicts investors in Western banks may find themselves a leg up on their geographic counterparts, potentially achieving better growth than the rest of the U.S. over the next 20 years.

2010 should see a return to normalcy in corporate IT spending, with virtualization and security at the top of many CTOs’ wish lists this year.

“We think it’s important to keep in mind that normal IT spending growth is kind of low to mid-single digit. There will certainly be areas where there’s faster growth than that,” said Todd Weller, an analyst at Stifel, Nicolaus & Co. “The other thing that I think you’ll see happen in 2010 is certainly there will be desktop, server and networking equipment refreshes as well to consider. We think in 2010, you get to a better outlook and visibility is better as well.”

Weller bases his forecast on the solid 4Q and December-quarter results released by a number of software companies, demonstrating a trend toward improved IT spending since year end. The analyst predicts the majority of 2010 IT investments will fall in the realm of cost-effective upgrades and new technology that should lead to high ROI.

“For example, from a recent InformationWeek survey, with respect to 2010 new technology investments, there was a new customer facing projects like Web portals, sales and self-service systems, new applications to support sales, new applications to cut operating costs,” said Weller, also highlighting Windows 7 as a meaningful catalyst for software updates. “Server virtualization was up there, telepresence, video conferencing, software as a service, desktop virtualization. That gives you a sense of some of the focus points.”

Of the information security companies, Weller believes ArcSight (ARST) is the most poised for growth, with 30%-plus growth rates already. Under the infrastructure umbrella, the analyst cites VMware (VMW), Citrix Systems (CTXS) and Red Hat (RHT) as important plays on virtualization.

Nick Majendie, director and senior portfolio manager of Majendie Wealth Management at Scotia McLeod, the brokerage arm of The Bank of Nova Scotia, is targeting dividend-paying stocks as a major component of his portfolios. And it comes as no surprise to him that the best names in the dividend-paying category are Canadian.

“What I would like to highlight here is that Canada does have a much greater proportion of solid dividend-paying companies where we see the potential for sequential increases in dividends over the next five years,” said Majendie, whose calculations show an average five-year earnings growth rate of just under 7% for the 30 companies in his balanced portfolio, which excludes commodities. “And the dividend-per-share growth rate, we estimate over the next five years, will be 5%. If you take the current yield plus the long-term earnings growth rate, if P/E multiples don’t change, you should get a healthy double-digit return from that type of portfolio.”

Majendie also points out the dividend yield on the S&P/TSX is similar to Canada’s bond yield, whereas U.S. stocks are much less competitive with U.S. bonds on a yield basis.

“In Canada, the S&P/TSX, which has 200-odd stocks in it, has a yield of almost 3% - about 2.9% to be precise - whereas the Government of Canada 10-year bond yields about 3.5%,” Majendie explained. “When you compare [dividend-paying securities] with competing bond yields, some of these companies, particularly in Canada, have very attractive dividend characteristics; and this is one of the key themes that they are espousing not just for this year but also for the next number of years.”

Also take into account the fact that Canada’s banks are in a much better position than their U.S. counterparts - and that Canada’s TSX has outperformed the U.S. every year since 2000 - and it seems some of the highest-yielding stocks have gone north.

“If you did consider the change in currency, the Canadian dollar in 2000 was in the mid- to high 60s and it is now in the mid-90s,” Majendie said. “Thus, as a Canadian investor, you would have been a further 30% better off by investing in Canada versus the U.S. We think that’s the overall context.”

In this excerpt from TWST’s interview with Tristan Gerra, a senior analyst covering semiconductors at Robert W. Baird, Gerra outlines the challenges currently facing the semi supply chain, highlighting how this may impact the industry going forward.

TWST: What is the status of the semiconductor component sector right now?
Mr. Gerra: We continue to expect an upcycle for most of this year, which would be a continuation of what we saw since last February of 2009. The reason we believe the cycle would extend a few more quarters is that the inventory levels remain at historic lows in the supply chain. We’ve seen a slow resumption in true end demand, and the supply chain hasn’t been able to catch up. So we think that until we see the supply chain normalizing, we think trends are going to continue to be above seasonal for semiconductor companies.

TWST: What are the challenges in the supply chain?
Mr. Gerra: Because the supply chain to some extent overreacted late 2008/early 2009 by drastically cutting down inventories below what was the real trend of end demand, the supply chain is trying to catch up with the ongoing recovery in end demand but hasn’t been able to do that. So lead times, as a result, have expanded pretty drastically for some components. In some cases, lead times are stretching over 20 weeks, and we’re not at a point yet - even after a few quarters, where we are seeing replenishments - where lead times are coming down. So we are in an environment where demand is stronger than supply at this point.

TWST: Did supplies go down because of the economy?
Mr. Gerra: Well, the triggering point was retail sales in the U.S. well below expectation in October and November of 2008, and that was in the context of people having significant concerns about the economy and what was happening in terms of banks. So as soon as people saw the weakness, they drastically cut orders in order to reduce inventory levels.

TWST: What else is happening in the component sector?
Mr. Gerra: I think we are likely to see potential increases in wafer pricing this year, which is the result of utilization rates being around 100% at some of the major foundries in Taiwan; that’s one issue. Component pricing could pick up a little bit, particularly on the commodity side, which would be the first time in several years we have seen that. So net-net, it’s about ramping capacity but gauging what real end demand is, and being in a situation where we could potentially have overcapacity again exiting this year.

Semiconductor companies that specialize in wireless and wireline communications, otherwise known as “comm. semis,” must respond to industry-shaping trends in order to stay afloat, and remain both competitive and efficient. But what are those trends and which names are staying ahead of the curve, following last year’s rally in stock prices?

“The first trend relates to integrating multiple chips into a single chip. Solutions that were offered across two, three or more chips are now being offered on a single chip. These chips are commonly referred to as ’system on a chip,’ or SoC,” said Anil Doradla, an analyst at William Blair & Company. Doradla’s coverage universe includes communication semiconductors, wireless communications and electronic components companies.

“I believe companies that have SoC capabilities will continue to succeed. Examples include Qualcomm (QCOM) and Broadcom (BRCM) in the 3G and 4G space, Atheros (ATHR) in the WiFi space, Cavium (CAVM) and NetLogic (NETL) in the non-PC microprocessor space, and Silicon Labs (SLAB) in the mixed-signal space,” he added.

Another important trend Doradla observes is what he calls “application awareness,” which refers to the increased awareness of end-user applications by semiconductor chips and telecom infrastructures.

“Over the past couple of years, companies adopting these trends have seen significant payoffs. Successful companies, such as Starent Networks, now part of Cisco (CSCO), Cavium Networks, FFIV (FFIV), NetLogic Microsystems and Riverbed (RVBD), have one thing in common: All their products are application aware,” Doradla said. “These companies have successfully taken market share from their plain-old-vanilla system counterparts and have created businesses that are rich in ASPs and margins.”

With many questioning whether or not the semiconductor space has reached its peak or is dangerously teetering on the top of its rally, one analyst maintains a bullish take on the industry, citing strong macroeconomic trends and better-than-expected PC sales as two demand drivers.

“I upgraded my group, the equipment space, in May of 2009. It’s worked out pretty well up to this point,” said Patrick Ho, an analyst at Stifel, Nicolaus & Co. “I think we’re going to see a very good 2010. I’m not a subscriber to the view that things will peak out mid-year, which is what I think some of the bears are saying right now, and the second half of the year is going to be down from the first half of the year. I do not believe that.”

Ho believes last year’s launch of Windows 7 will translate to additional semiconductor demand, as the corporate world begins to update computers from the now 5-year-old Windows XP.

“If you got old PC systems that need to be upgraded, this could the perfect opportunity because you’ve got higher DRAM speed in memory devices, and you’ve got the new operating systems,” Ho said. “This would be the key driver, I think, on the memory side of things.”

The analyst also points to two more recent electronics launches, the Google (GOOG) phone and Apple’s (AAPL) iPad, as drivers of increased handset sales and chip consumption.

“Particularly, again, on the memory side of things, that’s going to be a driver, I think, for additional equipment spending because if the unit goes up, then unit devices go up,” Ho said. “That’s going to help, or that’s going to stimulate additional equipment spending because you have to get those production lines up to meet that type of demand. So I’ve got a pretty bullish view for 2010.”