If you're like most investors, "tech stock" probably brings to mind young, rapidly growing companies that make flashy, exciting products. And there was a time when most technology firms fit that description.
But it's not 1985 any more. Personal computers have been around for more than 30 years. The World Wide Web is two decades old. Today's pocket-sized smart phones have computing power that would leave your old Commodore 64 in the dust.
Firms like Hewlett-Packard and IBM today take in more than $100-billion (U.S.) in sales a year. Powerhouses like Apple and Microsoft have market capitalizations that rival those of the largest oil and gas companies. And they're not just big - many are also quite stable. India-based tech services giant Infosys Technologies has raised earnings per share in each year of the past decade; Apple and IBM have done so in every year but one.
In short, many of the biggest tech players have gone from being fast growing small companies to big, steady stalwarts. It's an inevitable transition, really. You can't grow earnings at 50 per cent a year forever; companies can only get so large.
Right now, the transition in the sector is helping to create an interesting opportunity. Because many of the big tech stalwarts aren't producing wild growth any more, they're sliding under the radar, and are turning into value plays, particularly in the U.S. market.
With that in mind, here's a look at some of the tech sector big boys whose attractive valuations are earning them high marks from my Guru-inspired investing strategies. Each of these strategies is based on the approach of a different investing great and many are finding something to like in today's crop of tech giants.
Bill Gates's software behemoth isn't the fast-growing dynamo it used to be. But it's still producing steady, solid growth, with a long-term earnings-per-share growth rate of about 14 per cent a year.
That moderate growth and the company's $69-billion in annual sales make it a "stalwart" according to my Peter Lynch-inspired model. Mr. Lynch, the mutual fund manager, famously used the PEG ratio - a company's price-to-earnings (PE) ratio divided by its growth rate - to find undervalued stocks with solid growth. For big stalwarts like Microsoft, he added dividend yield to the "growth" part of the equation. Microsoft, which yields 2.5 per cent, has a 0.6 PEG, which comes in well under this model's 1.0 upper limit.
My John Neff-inspired value model also likes Microsoft. Mr. Neff, one of the most successful fund managers of all time, looked for stocks with P/Es that were 40 to 60 per cent of the market average (a P/E that was too low could signal the stock was a dog). Microsoft shares sell for 10 times trailing 12-month earnings, which passes that test. Mr. Neff also developed a value metric called the total-return-to-PE ratio, which adds a stock's growth rate and yield and divides it by its P/E ratio. Microsoft's is 1.65, more than twice the market average (0.56) and its industry average (0.77), a great sign.
As I noted above, India-based Infosys has raised its earnings per share in each year of the past decade. That's one big reason it gets strong interest from my Warren Buffett-based strategy. In addition, Infosys also has no long-term debt and has averaged a 30.2 per cent return on equity (ROE) over the past decade. The high ROE more than doubles my Buffett-based model's 15 per cent target and signals that Infosys possesses the "durable competitive advantage" Mr. Buffett is known to seek.
Based in Kansas, this leader in global positioning system (GPS) technology has a $7-billion market cap. Competition and the recession have slowed its growth, but the one-time hot growth stock is now a nice value play, according to my Buffett model. Garmin's earnings per share have dipped in two of the past three years after increasing for the previous six years of the decade, but the Buffett approach sees that more as a buying opportunity than a major problem. It likes the firm's lack of any long-term debt, 26.4 per cent average ROE over the past decade and 9.2 per cent earnings yield.
These tech giants aren't without problems or challenges. Competition has slowed the growth of some; sheer size has limited the growth of many. But the switch from stratospheric growth to steady value isn't necessarily a bad thing for investors. In fact, in some cases, these less glamorous plays may offer more bang for the buck than flashier, fast-growing up-and-comers in the tech sector.
Full disclosure: I'm long Microsoft and Garmin.
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