Tech stocks cheap and nasty? Not necessarily

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What are we looking for?

U.S. tech stocks have taken a real beating in recent weeks – they are close to their cheapest levels in at least seven years, according to data compiled by Bloomberg, largely because of soft second-quarter earnings forecasts.

If you believe that we will still be using computers, servers and the Internet in the future, this could be an intriguing buying opportunity. With that possibility in mind, we went looking for large infotech companies with forward price-to-earnings ratios of less than 10. Then, bearing in mind that this is the risky, often cash-strapped, tech sector, we further narrowed the search to companies where levered free cash flow (money left for investors after interest has been paid) has grown at a compounded annual rate of at least 5 per cent over the past five years.

What did we find?

At the top of the list, the cheapest name turned out to be computer maker Hewlett-Packard. This beleaguered company has seen a great deal of turnover in leadership in recent years, most recently after its controversial $11-billion (U.S.) acquisition of software maker Autonomy. Chief executive officer Meg Whitman has asked investors to be patient while HP undertakes layoffs and cost cuts, and expands into areas such as enterprise computing services.

Seagate Technology, which dominates the hard disk drive market, is also on the list. Hard drive sales have been slowing as consumers switch from personal computers to smartphones.

So, maybe some of these stocks are cheap for a reason. It could well be that their best days are behind them – and the future belongs to their rivals. Some of them, such as Seagate, could well turn out to be attractive acquisition targets, as Dell already is.

Web.com Group, with the eye-popping ticker symbol WWWW, is interesting – here's a website designer that has exceeded analyst earnings forecasts by 10 to 20 per cent consistently over the past eight quarters, according to data on Globe Investor. Of the 11 analysts that cover it, two rate it "buy" and nine rate it "strong buy."

CACI International, based in Arlington, Va., runs IT and network services for U.S. armed forces, homeland security and intelligence operations. Sounds bulletproof? Well, of the 12 analysts that cover it, one rates it "strong buy," nine rate it "hold" and two rate it "sell."

NXP Semiconductors, spun off from Dutch lighting giant Philips, supplies electronics makers Apple Inc., Bosch, Panasonic and Samsung as well as automotive component producers such as Delphi and Continental. Seven analysts rate it "strong buy," while one has a "buy" rating and two rate it "hold." As always, do your own research before buying any of the names listed here.