11/22/2011 2:55 PM ET|
Are tech stocks the new safe haven?
Finally, our defensive tech plays look safer because they are fairly cheap. This may protect investors, because cheap stocks often fall less in market declines and rebound faster, says Provence. "And if they have a miss on revenue, it shouldn't hurt the company as much because they are already trading at a discount," he says.
To measure valuation, I'll use Peter Lynch's preferred price-to-earnings-to-growth ratio, which you get by dividing a company's price-earnings ratio by its growth rate. The S&P 500 currently has a PEG ratio of just over 1. Apple trades well below that, with a PEG ratio of 0.57. Intel and EMC come in below the market multiple with peg ratios of 0.89 and 0.9, respectively. IBM and Cognizant carry PEG ratios slightly above the market's.
"They are not cursed with high expectations," say Lowenstein. "So you are getting better-than-average growth at a lower price, and we like that kind of combination."
While valuations are cheap because tech investors view these companies as dinosaurs, in many cases they are exposed to the hot trends like cloud computing (the use of centralized computing to power business software services or mobile devices).
Take Intel, for example. "The knock on Intel is that it is tethered to the PC ecosystem," says Lowenstein, whereas the big growth in consumer electronics is in mobile phones and tablets. But Intel uses its financial clout (remember all that cash?) to fund massive research efforts that are helping it become a significant player in low-power chips for tablets and other mobile devices. "The market is not giving them any credit for that," says Lowenstein. Intel is also a play on cloud computing because servers are key in that trend, and chips for servers are Intel's bread and butter. Besides, the PC is not going away. "The core business keeps chugging along," says Lowenstein. "The risk-reward for Intel is very attractive."
Similarly, IBM may look like a boring mainframe company, but it also has a hand in cloud computing through server and software offerings.
EMC has a growth angle, too, because the amount of data created by companies will grow at about 40% a year for the next several years, says Morningstar's Holt. "All that data has to go somewhere. They are solving a problem that doesn't necessarily ebb and flow with the business cycle."
Cognizant delivers much of its software development from India. With companies looking to contain costs in a tough economy, they'll turn to Cognizant for lower prices.
And a risk at Apple is that it just lost Steve Jobs. "But there are several products in the pipeline that Jobs was a big part of," says Provence. "And there are plans for additional products down the line that he had his hands in."
Despite this potential, Apple stock trades for 9.5 times next year's earnings. "Unless there's a huge miss on revenue, which I don't anticipate, that's a pretty cheap," says Provence.
So, are all the stocks of all these tech companies really "safe"? There's an app for that. As one measure of safety, investors like to look at a stock's "beta," a measure of how much a stock moves along with the market. A stock that normally moves in line with the market has a beta of 1, whereas a stock that moves up or down much more than that the market has a beta well above 1. With the exception of Intel, which has a beta of 1, all of our safe-haven tech stocks have betas below 1, with IBM the lowest at 0.49, followed by Apple at 0.89, Cognizant at 0.91 and EMC at 0.95. There's safety in those numbers.
At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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Tech stocks...really! This is the way out? Are there not more pressing things to be addressed. Europe is collapsing under insurmountable debt and two dictators have been installed in place of elected officials. Housing continues to fall. The stupid committee could not agree to cut 1.2 trillion (peanuts) over a TEN YEAR period on a debt that is currently 15 TRILLION. Bernanke is echoing thoughts of QE3, another round of make believe stimulus to borrow more from the dwindling tax payers to pay the interest on what already has been borrowed. How has this worked so far? Corrupt politicians, captured media, an attorney general that refuses to prosecute a fraudulent banking system and there is so much more, but people seem to be happy watching NFL and Dancing with the Stars. I think some real honest talk on how to prepare one's self for the 2nd great depression would be in order.
iowaview; It's not a left, right thing, both parties are money whores and both are owned by the lobbiests and banking cartels. The key would be to separate the money from the politics (not an easy task, but doable). Once you get rid of the central bankers the system could work again. We've become a government for the banks, by the banks and of the banks.The Federal Reserve is the cancer that just keeps on growing.
Doug: can't argue with what you pointed out..and my comments were meant to be global as today's issues will effect the entire world.
so much for tech stocks.............??
I think some real honest talk on how to prepare one's self for the 2nd great depression would be in order.
Fastback49 .. Looking around the world, I think more than "just one's self" ought to be in on the conversation, about what to do with the adjustment in these depressing financial times. The sad part about watching things unfold, is that It could have been prevented with bold measures from some statesman in Congress (fiscal policy) .. and some common sense in Europe instead of the picket fence attitude.
I don’t see a whole lot of upside in the tech sector for quite some time. I only see huge amounts of risk. Oh, well where fools rush in. Knock yourself out, but when labor shortages cap growth, skyrocketing labor costs sap earnings, bitter labor strife affects production schedules, and other mismanagement whip saws your tech portfolio in comming years don’t say I didn’t tell you so.
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