NEW YORK (CNN/Money) -
The giants of tech have awoken from their slumber.
Shares of big-cap companies like Cisco Systems, Dell, IBM and Microsoft haven't enjoyed the meteoric runs of smaller and more speculative rivals, many of which have doubled and tripled this year.
That's finally starting to change.
IBM (IBM: up $0.88 to $91.17, Research, Estimates) closed above the $90 level on Tuesday, the first time that has happened since April 2002. Shares of Big Blue are up more than 10 percent so far in September, usually a rough month for the overall market.
Cisco Systems (CSCO: down $0.30 to $20.99, Research, Estimates) hit a new 52-week high Tuesday, and its stock has climbed 11 percent so far this month. Dell (DELL: down $0.27 to $34.33, Research, Estimates) and Microsoft (MSFT: down $0.27 to $28.63, Research, Estimates) are up 6 percent and 9 percent, respectively, in September.
"Some of the worst companies have been the best performers," said Kent Mergler, president of Northstar Capital Management, which runs the Fremont Large Cap Growth fund. "But a lot of the recovery in the poorer-quality companies was just relief that they survived. We're finally starting to see some better action in the higher-quality names."
The leaders are starting to lead
While many of the best-performing small techs were on bankruptcy watch just a couple of years ago, the larger companies have remained on much firmer ground.
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Though they also suffered during the tech downturn, for the most part these companies were able to cut enough costs and gain enough market share in order to avoid being severely bruised.
Cisco, for example, reported earnings per share of 59 cents in fiscal 2003, 11 percent higher than its fiscal 2000 total, when the entire tech sector was booming. Dell recently reported its highest quarterly revenue in the company's industry. And chip leader Intel (INTC: down $0.03 to $28.88, Research, Estimates), which is in the highly cyclical semiconductor sector, is expecting total revenues for this year to slightly exceed sales from 1999.
"Dell, Intel, Cisco and Microsoft are stronger today than a few years ago," said Daniel Boone, managing partner of Atlanta Capital, which runs the Calvert Social Investment Equity fund, which owns those stocks.
Stocks not cheap but reasonable
Of course, the big question regarding all tech stocks is valuation. Are the large-cap leaders too expensive now?
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| | Company | | P/E Forward 12 months | | Est. LT EPS Gr. Rate | | Cisco Systems | 33.3 | 15% | | Dell | 31.2 | 15% | | IBM | 19.8 | 10% | | Intel | 30.1 | 15% | | Microsoft | 26 | 11% | | S&P 500 | 18.4 | 7% |
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Mergler thinks that large-cap techs are fairly valued but have more upside since many of the companies have lower PEG ratios than the S&P 500. The PEG ratio compares P/Es to earnings growth rates.
The PEG ratio for the S&P 500 is 2.6, based on earnings estimates for the next 12 months. Dell, Cisco and Microsoft, which Mergler owns, have PEG ratios of 2.1, 2.2 and 2.4, respectively.
Boone also thinks large-cap techs have room to run because he believes Wall Street is underestimating how strong earnings will be in the next few years.
His earnings target for Dell is between $1.40 and $1.45 a share in fiscal 2005, well above Wall Street's estimate of $1.21. And Boone thinks Cisco can earn 80 cents a share in fiscal 2005. The Wall Street consensus estimate is 74 cents.
Based on these estimates, Dell and Cisco are trading at 24 and 26 times 2005 earnings estimates, respectively, which Boone thinks are fair premiums to pay for market leaders.
"Solid tech companies are not overpriced at all," said Boone.
Of course, this is all depends on a continued recovery in corporate tech spending. If businesses tighten their IT budgets next year, then it would be hard to justify the runs that any tech companies have had in 2003.
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