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Tech bargains in this market?
Yup. There are some attractively valued techs. Microsoft, Qualcomm and EA top the list.
May 15, 2003: 1:35 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - Finding a tech stock bargain in this market is not easy.

With the Nasdaq up more than 20 percent in the past two months and nearly 40 percent since its early October lows, value seekers are mostly coming up empty.

So what's an investor to do? The temptation is to flock to quality, large-cap bellwethers. But you'll pay. The average P/E for the S&P Technology group is 31, compared to the S&P 500's average of 18 (based on estimates for the current year)

Still, there are some intriguing values out there.

To find them, I used the Thomson/Baseline database. I looked for companies with a P/E ratio no higher than 25. I figure most investors, even bargain hunters, are willing to live with some premium for a growing tech company.

After that, I made sure that the companies were expected to post earnings and revenue increases this year of at least 10 percent. I didn't want a tech company that is simply using cost cutting to juice earnings growth.

Finally, all had to have upwards earnings revisions during the past three months and a market value of at least $400 million. Thirty-one survived this screening process. I chose six to highlight here.

The "big" bargains

Microsoft made the cut...barely. It trades at about 24.6 times estimates for this fiscal year. But interestingly enough, the world's largest tech company has not been a major beneficiary of this year's massive tech rally. Although the shares are up 12 percent since the upswing began on March 11, they are still down slightly year-to-date.

Despite Microsoft's many recent public relations gaffes (an Internet toilet?), it's hard to find a company that is in better financial position. $46.2 billion in cash. No debt. And even in a year as tough as this one, Microsoft is expected to report an earnings increase of 14 percent and sales growth of 13 percent. Now, it even pays a dividend (however small at 0.3 percent).

Qualcomm started paying a dividend this year as well. And it continues to post strong gains in earnings and sales but the stock trades at only 22 times earnings.

Six tech values
The Nasdaq has soared this year but there are still some bargains in tech.
CompanyP/EEPS Gr. RateRev. Gr. Rate
Affiliated Computer Services23.625%26%
Electronic Arts19.421%15%
First Data21.216%13%
* based on estimates for this fiscal year and prices as of 5/14

There have been concerns about a slowdown in demand for its cell phone chips in Asia, and as a result, the stock has fallen more than 10 percent since the beginning of the rally and 15 percent for the year. But that's not a long-term problem. The potential for growth in China and India remains huge over the next few years.

Electronic Arts is another industry leader that appears to be in the sweet spot. EA, the world's largest developer of video games, is trading at only 19 times earnings, just a slight premium to the overall market.

The company continues to post stellar gains in sales as consumers continue to spend on new titles for PlayStation2 and Xbox, particularly its wildly popular "The Sims" series of games.

First Data, the largest processor of credit card transactions, also looks attractively valued. The stock trades for 21 times earnings estimates, very reasonable for a company that typically posts earnings and sales gains in the mid teens.

What's more, First Data announced a very savvy acquisition last month that should help boost growth, agreeing to buy ATM transaction processor Concord EFS for about $7 billion. That deal is expected to close in the second half of this year.

Lesser-known value plays

Two smaller companies that made the list are Affiliated Computer Services and Zoran.

Affiliated is part of the white-hot area of IT outsourcing, but it gets far less attention than IBM or EDS. The stock trades at about 24 times earnings and is expected to post earnings and revenue gains of about 25 percent this fiscal year and 18 percent next year. The company recently announced that the Department of Education extended a lucrative student loan processing contract for another three years; it had been set to expire this September.

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Zoran is an interesting semiconductor company that focuses on the consumer electronics market, an area of tech that continues to blossom. Zoran's chips are widely used in digital cameras and DVD players. Earnings are expected to increase 12 percent this year and 39 percent next year. The stock trades at 24 times estimates.

Plus, Zoran (like First Data) recently made a smart acquisition, scooping up Oak Technology earlier this month. Oak Technology's chips are used in digital imaging devices and high definition televisions. This should make Zoran an even stronger player in the consumer electronics semiconductor market.

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