Buy these 11 tech stocks while they’re down

The miniature tech bubble of 2013 has come to its inevitable conclusion with an unholy stock price shellacking for the sector's high flyers. Facebook Inc. stock, for instance, went from $24 (U.S.) in June of last year to $70, only to fall $14 since.

Despite the carnage, few investors doubt that profits in the technology sector will continue to grow faster than the economy or the S&P 500 average over the long term.

So, we have a beaten down sector with a strong, long-term profit outlook. It's time to go shopping for value.

The technology market sector is still extremely volatile, so it makes sense to use a Warren Buffett-style screening technique to look for opportunities. Mr. Buffett's investment method favours reliability of cash flow growth and low valuation levels relative to the stock's history. In other words, he doesn't look for the highest profit growth, but stocks representing the most dependable growers when they are trading at a discount.

All 67 members of the S&P 500 Information Technology Sector Index were first ranked by standard deviation of cash flow growth over the past 10 years.

A low standard deviation suggests the type of consistent growth – even through the financial crisis and recession – that we're looking for to provide downside protection in the case of short-term market volatility.

The top 15 stocks by cash flow were then ranked by trailing price-earnings ratios relative to the company's 10-year average. This is another Warren Buffett trick – he looks for stocks trading at a 30 per cent discount to the historical average price-earnings ratio. The accompanying table of 11 stocks shows the results of the screen.

The most attractive stocks in terms of valuations are eBay Inc., network security software provider Symantec Corp., cloud computing software maker F5 Networks Inc., Cisco Systems Inc., IBM Corp., and Google Inc.

EBay and IBM have problematic outlooks. EBay is struggling to maintain profits in the face of Amazon.com's extremely aggressive "we don't care how much it costs" push for market share. In IBM's case, earnings growth has stalled and a large scale cost-cutting initiative has begun.

At first glance, F5 Networks and Google look the most promising. The trailing P/E for both companies is about 29 times. Admittedly, this isn't a bargain-basement level, in light of the S&P 500's 17.2 average. But F5 is well positioned to benefit from the proliferation of cloud computing.

The company specializes in virtualization software – applications to allow individual work stations to use the cloud (instead of software that is installed on every desktop). F5 has grown earnings at a 25-per-cent annual pace in the past three years and may be deserving of a premium multiple.

Analysts estimate that Google's profit growth will average just under 20 per cent for the long term. The company's gross profit margin, at 57 per cent, makes it a virtual cash machine.

In the midterm, the performance of technology stocks will depend on economic growth. If, as economists have been predicting every year for the past five, the U.S. economy accelerates, then market returns may shift to cheaply valued, economically sensitive sectors like industrials and manufacturing.

Over the long term, however, few sectors have the almost-assured growth profile of technology. Patient investors are likely to be rewarded for taking advantage of the current stock price volatility.

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