27 Large-Cap Tech Stocks Stand Out for Potential Value

Alan Brochstein suggests tech stocks are among the most attractive in today's market

Last summer, I shared on the TK All-Star blog my view that large technology stocks were offering a compelling valuation, especially for conservative investors. They have improved in price, with several of the stocks discussed rallying, but the sector still looks very attractive. I want to review the sector again, as my conviction is growing that the sector offers among the highest risk-adjusted returns. My conviction runs strong enough to push my equity exposure in tech in both of my model portfolios to very high levels. 

What’s driving my thinking? It’s really the same factors I mentioned last time:

·  Great balance sheets

·  Many pay decent dividends

·  High international exposure

·  Growth drivers like data storage, cloud computing, consumer electronics

The market is currently infatuated with energy and industrial stocks among larger companies as well as smaller growth stocks. While the absolute growth levels for large-cap tech companies might not be off-the-charts, the valuations sure are. According to S&P 500 data, the 2011 P/E for Technology is 13.7, while it is 15.8 for Industrials. Interestingly, the expected earnings growth is slightly higher for Technology, at 16% compared to 12% for Industrials. I think this is one of the strangest relationships in the market currently. When adjusted for the balance sheets, the comparison is even more favorable, since Industrials typically carry more debt. 

There are 75 Tech stocks in the S&P 500. Which ones jump out as really cheap to me? To answer that question, I ran a simple screen:

·  PE < 15

·  Net Debt to Capital < 20%

Here are the 27 names that made this first cut, ranked by P/E:

I left National Semiconductor (NSM) on the list, which was based upon 4/4 prices, though it is currently up sharply following the announcement that Texas Instruments (TXN) will be buying them at $25. It serves to highlight my point: other players find these stocks cheap, too! As you can see from the averages at the bottom, the P/E for these stocks averages just 10.8X despite very low net debt to capital on average. Additionally, on average these stocks are working, with the average up close to the overall market average so far in 2011 and up 11% over the past year (behind the S&P 500 at about 13%). I have highlighted (in green) the several names that offer above-market dividend yields.

If you are a conservative investor, large-cap tech stocks deserve a look, though I think performance-oriented investors should consider them as well as part of a contrarian strategy. It is the largest sector in the market and offers some great attributes, including global exposure, growth, strong balance sheets, market dividends or higher for many companies and reasonable valuations. For those who use options, selling puts or writing calls against long positions deserve consideration in my view.

Regards,

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  Long AMAT, CSCO and INTC in the Conservative Growth/Balanced Model Portfolio  and CSCO and INTC in the Top 20 Model Portfolio at Invest By Model

Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs. 

Alan Brochstein maintains a business relationship with TradeKing.