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Commentary > Sivy on Stocks
Tech: Cheaper than you think
America's top technology stocks are selling at the lowest P/Es in more than a decade.
November 29, 2004: 6:11 PM EST
By Michael Sivy, CNN/Money contributing columnist

NEW YORK (CNN/MONEY) - Lots of things in the stock market are unpredictable. But the one thing you know for sure is the price you pay for a stock when you buy. And when a particular sector is unusually cheap, it's worth careful consideration.

Right now, America's top technology companies stand out for their low valuations. The biggest tech stocks dropped at least 60 percent from their peak prices following the late 1990s boom. And since then, their earnings have come back faster than their share prices. The result: Tech price/earnings ratios have continued to fall.

In fact, based on projected earnings for 2005, big tech P/Es are below the historical average and the cheapest they've been since 1992.

You might think that these decade-low valuations indicate a poor outlook. But prospects for leading tech companies are remarkably good. Overall, earnings for top U.S. tech stocks are projected to increase nearly 15 percent in 2005.

Since the tech wreck, these companies have been streamlining operations and cutting costs. The result is that their gross profit margins are well above the median for the past decade, and in some cases near 10-year highs.

The biggest tech companies have also been benefiting from a flight to quality. In a time of uncertainty, U.S. corporations prefer to buy from the largest and best-established vendors.

Five of the best-known names in tech -- IBM, Cisco, Oracle, Motorola and Applied Materials -- are now trading at less than 20 times projected 2005 earnings (the P/Es shown for these stocks in theSivy 70 list are based on 2004 earnings and are slightly higher).

If you're a long-term growth investor, you might want to take a look at all five of these stocks. Even the ones that are not timely are probably cheap from a long-term perspective.

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If you have a shorter time horizon, or you're more conservative, you may want to be more selective, but it's still worth including tech in your portfolio.

Fact is, even a conservative investor should probably keep 10 percent to 15 percent in a diverse assortment of such stocks. This turns out to be harder to do than you might think. Mutual funds would seem to be the most natural approach. But most tech funds focus on aggressive niches and on small to mid-size companies.

One way to gain exposure to tech is through exchange traded index funds, such as the Nasdaq 100 (QQQ (Research)) or the slightly more conservative technology Spider (XLK (Research)), which holds the tech stocks in the S&P 500. I own shares in both of these ETFs myself.

A large-cap growth fund is also an option. Just look at the fund's largest holdings to make sure that technology is well-represented.

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Of the five big tech stocks with P/Es under 20, the one that looks most conservative -- and also most timely -- is IBM. The company is the world leader in hardware and also the leading supplier of technology services. And given the company's long, established record, IBM (Research) is a top pick for corporate IT spending.

Sales are projected to grow nearly 6 percent next year, supporting a double-digit increase in earnings. Profit gains are projected to average 10 percent annually over the next five years. And at $95.50 a share, IBM trades at less than 18 times projected 2005 results.

Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.  Top of page

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