The Numbers Say Tech Stocks Are Cheap

Computer and software stocks have slumped to their lowest valuations in two decades, a sign to some analysts that they are poised for a rebound.

Tech companies in Standard & Poor's 500-stock index traded as low as 15.1 times reported annual income this month, according to Bloomberg data. The biggest industry in the index hadn't been that cheap since at least 1992, excluding the six months between Lehman Brothers' bankruptcy and the start of the bull market in March 2009. Using analysts' estimates for 2010 earnings, the group is even cheaper, at 13.4 times projections as of July 13.

As a group, tech stocks trailed the S&P 500 for seven of nine years through 2008. This year they're down 4.6 percent, vs. the S&P 500's 1.8 percent drop. "The technology sector has been overlooked," says Kevin Gardiner, who helps oversee $241 billion as head of global investment strategy at the wealth management division of Barclays (BCS) in London.

Attractive valuations and renewed tech spending by U.S. companies that are sitting on a record amount of cash may lift shares even if growth slows, according to UBS (UBS). Income at tech companies will rise 42 percent this year, compared with 34 percent for the S&P 500, according to the average estimate of more than 2,000 analysts surveyed by Bloomberg. Intel (INTC), the world's biggest chipmaker, reported record second-quarter sales on July 13 and better-than-anticipated earnings. It also estimated strong sales for the third quarter.

Doubts About a Rally

Not everyone believes tech stocks will rally. "My biggest concern is the overall growth of the U.S. economy and of Europe, since those tend to be the largest purchasers of technology," says Brian Jacobsen, chief portfolio strategist for the mutual fund division of Wells Fargo Asset Management (WFC), with assets of $465 billion.

Traxis Partners' Barton Biggs, whose flagship fund returned three times the industry average last year, says he sold most of his U.S. technology holdings two weeks ago on signs the economy is weakening.

Others believe tech stocks will shrug off any short-term economic slowdown. "We're in the midst of a pretty strong earnings recovery," says Chip Miller, a New York-based equity strategist for UBS. "Tech fundamentals thus far have remained strong. Given how cheap they are, if you take a little bit of a longer- term perspective, it's probably a good buying opportunity."

The bottom line If companies use some of their abundant cash to shop for computers and related products, tech stocks could see a big bounce.

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