Flirting with tech stocks

September 21, 2007

Your Money

Key Points

Back in early 2004, I told you to sell your technology shares if you hadn't already. Turns out I was prescient in my advice. From 2004 through 2006, tech stocks underperformed the S&P 500 by around 4 or more percentage points each year.* But now it's time to take another look at these issues, since many tech shares have enjoyed recent attention, and in some cases strong above-market gains. Year-to-date through late-August, the technology market has returned nearly 11 percent, a full 6 percentage points above the S&P 500.

Between the stocks' rebound from their lows (despite recent market gyrations), and sea changes within the companies themselves, I'm newly intrigued. As a value investor, I've never been a big fan of tech stocks, which historically have been considered growth issues. But their underperformance over the past six years has eliminated the froth that kept me from buying them in their heyday. Now I can find several tech stocks that meet my value criteria: strong fundamentals, good outlooks, and reasonable prices.

Technology stocks are pretty volatile, but if you're willing to take the risk, you could be nicely rewarded. In 2003, they returned nearly 40 percent for lucky investors, and last year delivered a respectable 12 percent. But be forewarned about the downside. Their higher beta coefficients, a measurement of volatility, mean that when the market drops, they're likely to fall even further. And by virtue of being on the leading edge, tech companies are often the targets of intense competition.

Having warned you, I'll tell you about a few promising tech stocks that recently caught my eye. They're what I call "busted," selling for inexpensive prices relative to their earnings. These are well-established, larger companies that have significant market share; there's not one "hot" new tech player in the bunch.

Intel, the king of the microprocessor industry, lost market share to its rival Advanced Micro Devices over the past few years. But Intel's position as the largest semiconductor company in the world enables it to fight back with both guns. Their massive financial resources and R&D budget allow them to invest in cutting-edge manufacturing technologies. They're aggressively planning to introduce new chips every two years. These steps should help Intel win back its lost share from AMD, and post above-average earnings in the process.

Dell is another company that's recently fallen from grace but shows signs of a successful re-emergence. Earlier this year, Michael Dell took back the helm from resigned CEO Kevin Rollins after several years of underperformance and strong competition from Hewlett-Packard. Dell's future holds promise because it has increased its international exposure and improved its customer service. Plus, Dell has realized the importance of retail store sales. This summer, it started selling several of its desktop and notebook PCs at Wal-Mart Stores across the US.

I also like the recent news and long-term prospects for software maker Oracle. Over the past three years, it has spent more than $20 billion acquiring related companies. Oracle has also increased its customer base and penetrated new markets with this strategy. Earnings per share have increased steadily since 2002, and the trend is expected to continue well into the future.