Strange as it may sound, some well-known tech giants have become value plays. Traditionally the province of growth stocks, the tech sector typically offers higher returns at the cost of higher risks. In this uncertain market, investors are shying away from techs, but that has left some promising companies with low valuations.
The sector has had some wild times, up and down. The '90s were obscenely kind to tech stocks. Throughout that decade, the S&P 500 rose fourfold, but the Nasdaq 100 -- a rough proxy for large-cap tech stocks -- rose by a factor of 16. After that, though, things haven't gone well for tech: Since Jan. 1, 2000, the Nasdaq 100 has fallen 51%, versus a more moderate 27% decline for the S&P 500.
Of course, most tech stocks were grossly overvalued at the end of the '90s. The following collapse corrected that, but in a sense the pall that hung over tech never fully cleared. So, when the banks led the market down again in late 2008, tech stocks were dragged lower, too. They've since rebounded strongly, but even now in the summer of 2010 they're still far from overvalued.
Ready to Rebound in Relief
How far from overvalued? Investors who missed out on the chance to buy tech shares at low valuations after the bankruptcy of Lehman Brothers have another chance. Excluding the six-month post-Lehman market collapse, the S&P 500 Information Technology sector is at its lowest level since 1992, trading at 15.6 times the net income of the component stocks, according to Bloomberg.
Of course, just because a stock is cheap doesn't mean it's going to rally. It could be beaten down for a good reason, such as concern about some impending threat of weaker profits. In the case of tech, that threat is clear enough: a possible double-dip recession, triggered by Europe's debt crises or China's efforts to cool its overheating economy.
But neither of these are endemic to the tech sector itself. And if the global economy doesn't slip into a second recession, the sense of relief could be doubly bullish for technology companies. Businesses in all sectors that have stockpiled cash will be ready to spend it on new info-tech projects and on the upgrades they've put off.
Spillover from Intel's Good News
I was curious which large-cap companies had price-earnings ratios below 15, so I used DailyFinance's stock screener. One prominent name was Intel (INTC), which has a trailing 12-month P/E of 12.6 and a forward ratio of 10. Intel's earnings per share are expected to reach $2.06 in calendar year 2010, up from 77 cents in 2009.
In the conference call last week to discuss its second-quarter earnings, Intel executives said data-center revenue was up 170%, that companies are replacing their aging PCs even in these uncertain times and that 40 million netbooks would be sold this year.
What's bullish for Intel is bullish for some PC makers as well. Such as Hewlett-Packard (HPQ), which has a trailing P/E of 13 and a forward P/E of 9.3. Last week, Gartner said PC unit shipments rose 21% in the second quarter, and amid that rise HP had a 17.4% market share.
HP faces some risks, however, such as the growing share of the PC market Chinese and Taiwanese rivals Acer, Lenovo and Asus are grabbing. But some analysts believe Intel's surprisingly strong earnings bode well for HP, which reports its latest results on Aug. 19. Longer term, HP's purchase of Palm gives it a respected operating system to expand its presence in the burgeoning smartphone and tablet markets.
Gorilla Glass Goes Gangbusters
Some tech companies with low valuations carry equal parts promise and risk. Corning (GLW) is an example. The LCD glass company's stock has a trailing P/E of 9.5 and a forward P/E of 8.5. Its products have benefited from demand for LCD TV displays, but Goldman downgraded Corning to neutral from attractive last week because demand for high-cost TVs is declining in the U.S. and China.
But others, such as Deutsche Bank, think the concerns about LCD TVs have been priced into Corning's stock. And still others, like Bernstein Research, point to Corning's scratch- and shatter-resistant Gorilla glass, used for laptops and smartphones, generating $1 billion in revenue in 2010.
Still other tech stocks are in volatile, feast-and-famine industries where the down cycles have left them unfairly beaten down. Such is the case with SanDisk (SNDK), the flash-memory chipmaker with a trailing and forward P/E ratio of 11.4.
SanDisk's stock has zigzagged between $6 and $60 over the past several years, so it's not for the faint-of-heart. While some see a decline in demand for flash chips leading to oversupply, others believe that fast-selling smartphones will keep revenue strong. Last week, UBS upgraded SanDisk to buy from neutral, arguing that new mobile phone designs will be a positive factor.
Risk remains as much a part of tech stocks as it always has. But in a summer when investors are more given to jitters than optimism, opportunities can be found. That some of these are in well-known and well-managed large-cap tech stocks could be welcome news for some cautious bulls.
Understanding Stock Market Indexes
What does it mean when people say "the market is up 2%"?View Course »