This Could Be the Best Opportunity in a Decade

The best opportunity in a decade?

I know, the headline sounds outrageous. Considering that China's growth is slowing, that the U.S. recovery is stalling, and that the EU is constantly under financial fire, there doesn't seem to be a plethora of opportunities out there.  

After a spectacular rally in 2009, the S&P 500 has dropped by about 5% so far this year. Almost no sector or asset class has been spared. But trust me: Keep reading, and I'll give you five stocks in one specific sector that are trading at dirt cheap prices.

Collateral damage
One very important aspect of the stock market's decline this year is the grave collateral damage. Certain events can shake the foundation of an entire sector, as we've seen with the BP oil disaster. For instance, take a look at ATP Oil & Gas (Nasdaq: ATPG  ) . This small-time oil and gas developer has derived much of its revenue from the Gulf of Mexico and has about 68% of its reserves locked up in the Gulf.

Because of a possible drilling moratorium and the expectation that oil exploration will be more heavily regulated, ATP has taken a dramatic beating in the market. It's down a whopping 50% this year. However, is that really appropriate? ATP still has about 32% of its reserves in the North Sea, and although it is a high-risk, high-reward investment, the company has enormous upside.

Similarly, dry bulk shipper DryShips (Nasdaq: DRYS  ) has fallen by 38% this year. Because it's a Greek company (although its revenues are totally diversified) and because the Baltic Dry Index has been pummeled, Dryships seems more like a victim of the market than an actual candidate for a massive sell-off. In fact, last quarter, both revenues and net income climbed higher, and the company continues to perform quite well considering how drastically dayrates have fallen.

Look no further than tech titans
Sift long enough through the carnage of battered stocks, though, and you'll find one asset class that is trading ridiculously low, and for very dubious reasons. Look no further than your average technology stock.

According to Bloomberg, tech stocks have slumped to their lowest valuations in two decades. Currently, tech stocks in the S&P 500 are trading at 15 times this year's earnings and 13.4 times next year's earnings. For a sector that is known for high growth and even higher valuations, this is quite impressive. It's even more impressive when you consider that income at tech companies is expected to rise by 42% this year. Compare that with the 34% increase expected for the general market, and you've got yourself an opportunity to invest in some of the best growth companies around at extraordinarily reasonable prices.

Furthermore, tech companies are sitting on record amounts of cash, which will benefit them should they choose to go on a shopping spree of if they just want to hunker down for a double-dip recession. Below, I've taken a look at the five largest technology stocks by market cap and evaluated their attractiveness using a variety of metrics.

Company

Price Change (YTD)

Forward P/E Ratio

Cash/Debt

Apple (Nasdaq: AAPL  )

16.5%

14.8

$23B / $0

Microsoft (Nasdaq: MSFT  )

(16.5%)

10.9

$37B / $6B

IBM (NYSE: IBM  )

0.1%

10.6

$14B / $26B

Google (Nasdaq: GOOG  )

(24.8%)

14.9

$30B / $0

Cisco Systems (Nasdaq: CSCO  )

(5.1%)

12.7

$39B / $15B

Source: Yahoo! Finance. YTD = year to date. P/E = price-to-earnings.

Sure, there are valid reasons why these stocks may be down. With the EU crippled and U.S. businesses not spending a ton of money, the companies listed above could definitely see a decrease in technology purchases. The top line could be cramped for the short term as small and medium-sized enterprises try to rein in spending.

However, Apple, Microsoft, IBM, Google, and Cisco are all trading for quite a bit less than their five-year average price multiples. With the exception of IBM, they are all sitting on boatloads of cash with minimal or zero debt, giving them a great competitive advantage should stocks become so cheap that it only makes sense to pursue tactical acquisitions.

And it's not like they haven't performed well this year. IBM, for instance, is on pace to achieve record earnings and operating margins in 2010. My foolish colleague Alex Dumortier thinks Big Blue is one of the most remarkably mispriced names in the market. Google reported quarterly results last Friday, and despite spending big bucks on overhead and hiring nearly 1,200 new employees, it still managed to boost earnings, while revenues grew by an awesome 23%.

The Foolish bottom line
If you look back at history, data will show that during downturns you can often find stocks that are trading at wildly low valuations. Sometimes it's small caps, as they tend to be pretty volatile; other times it is a specific sector that has gotten hit for good reason (like energy stocks right now). However, it's pretty rare that multibillion-dollar companies with huge economic moats, tons of cash, and a history of outperformance -- like the ones listed above -- are trading for such appealing prices.

If you're in the market for the long haul, then investing in a company like Google or Cisco at today's prices could be the best opportunity in a decade. I suggest you get in while there's still time.

Don't think these five stocks are cheap enough for you to invest in? Let me know it in the comments section below!

Jordan DiPietro owns shares of ATP Oil & Gas. Apple is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value choice. The Fool owns shares of Google, which is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (103)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2010, at 11:09 AM, eaglessoar wrote:

    check out iyw or xlk for etf play on the 5 mentioned in this article, i prefer xlk to iyw and own it myself, it has a better yield and lower expenses, includes more telecom and bus servs so is less of a pure play on the hardware software types mentioned in here (xlk being 70% hardware + software while iyw is 85%) iyw has more holdings giving it more diversification though xlk turns over about twice as much per year as iyw making it more liquid. iyw has performed better over 1 yr and yrs though

  • Report this Comment On July 20, 2010, at 2:01 PM, PeyDaFool wrote:

    Hey Jordan,

    Would it also be a safe assumption that Tech ETFs, such as PowerShares QQQQ, may also make a bullish run?

    Seeing that 18% of this ETF is comprised of AAPL and it, more or less, tracks Nasdaq, what are your thoughts about buying a Tech ETF?

  • Report this Comment On July 20, 2010, at 2:22 PM, TMFPhillyDot wrote:

    @peyDaFool,

    Yes, I think that Tech ETF's, especially those like QQQQ that are tilted toward large-caps, could be a good play. The P/E on QQQQ is about 17.1 -- it holds some higher priced stocks like Amazon and Starbucks, and it also has a fair amount of health care exposure, so just be mindful of that.

    But thanks for the comment!!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On July 20, 2010, at 4:49 PM, boobalots wrote:

    ETF's for metals are the best thing going since sliced bread. All aboard.

  • Report this Comment On July 20, 2010, at 5:36 PM, madhat007 wrote:

    antbody know anything about china yuchi? cyd is symbol?

  • Report this Comment On July 20, 2010, at 5:41 PM, TMFPhillyDot wrote:

    @madhat007,

    I don't personally know too much about CYD, but if you go to: http://caps.fool.com/Ticker/CYD.aspx , you should be able to see about 36 pitches that CAPS members have made. Some of them look to be quite informative.

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On July 20, 2010, at 6:33 PM, MJBCONT wrote:

    Jordan,

    So are you saying that ATPG or DRYS is something to maybe invest in or should you still wait?

  • Report this Comment On July 20, 2010, at 7:14 PM, TheDumbMoney wrote:

    I Rec'd this, though I believe that the Fools' increasing reliance on forward P/E in recent articles is in conflict with what some Fools have pointed out (which is true), that analyst's expectations for the profits-per-share of the S&P in 2010 and 2011 are more-likely-than-not to be optimistic.

  • Report this Comment On July 20, 2010, at 7:56 PM, TMFPhillyDot wrote:

    @MJBCONT,

    ATPG and DRYS are two very, very volatile stocks (both betas above 3.0). I own ATPG so I am of course partial; however, I would say that with these two companies, even more so than usual, you need to do your own due diligence and assess your risk tolerance. Owning ATPG is like being on a rollercoaster!

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On July 20, 2010, at 8:09 PM, FutureMonkey wrote:

    Jordan,

    Nicely done. Nobody knows what the market will bring tomorrow, but unless those big 5 stop generating cash they are trading at solid values. Could be a long sideways slide a la 1970's but you could do a lot worse pursuing speculative tips than investing in tech stalwarts.

    FM. Psst...got any speculative tips for me?

  • Report this Comment On July 21, 2010, at 6:12 AM, RafesUserName wrote:

    IBM $14B cash vs $26B in debt? Is that right? Ouch! ...and your "foolish colleague Alex Dumortier thinks Big Blue is one of the most remarkably mispriced names in the market."? I note his entire writeup focuses on P/E ratios in a vacuum...not cool, not cool at all.

    I love Google (and own shares), but I just dropped my Apple stock (yesterday). I was up 100% and felt all the Hype was built in with very little chance of it playing out quite like Apple hopes it will. (Which is one of many reason I would back Google). There are a few gems, which are hidden, (hint, hint), that I think are far more interesting than Apple right now, and would benefit if any or all of these companies start doing well - or anything having to do with the internet or bandwidth at all for that matter. Anyway, my point is twofold. First it is often better to be in the tech suppliers than tech directly, especially because it saves me from having to pick the winning horse, and second, when investing in these big companies, you have to take a 10 year view of things, check out growth possibilities, and make sure the balance sheet is strong.

    Apple is a self-destructive dictator while Google is a favorite grandparent with deep pockets and good stories...one of which is about how, back when he was your age, there was a company named Microsoft that seemed to own the planet....where are they now? Oh yeah, in debt, with nothing but... well nothing new anyway. When I look out 10 years, I see a bunch of better choices than the iPhone (which I own and love...for now), and I see free open-source cloud-based solutions that put Microsoft Office out of business. Microsoft had their chance to play nice with open-source; they didn't. If they aren't careful Windows7 will be there last great idea, right before some appliance that receives The Cloud at 60fps comes and takes over. Then they will be reduced to selling licenses for random solutions through HP data-centers. Like a beggar with a "will work for food" sign....fighting AMD and AmericaOnline for a highway off-ramp.

    - Rafe

  • Report this Comment On July 21, 2010, at 7:39 AM, Gorch wrote:

    I don't think the hype is priced in with Apple looking at current valuations. They are just opening doors to new technologies other companies will follow but not be able to reach in the near term. The iPhone is available for three years now? Did one competitor manage to come close to the iPhone or iPod Touch? Now Apple applies the technology to a new type of device, the iPad. I imagine the next step, applying the iPxx technology down to notebooks/tablets and static PCs. In a couple of years the internet will be even more accessible and bandwidth will grow too. There is a huge amount of revenues waiting for Apple to keep the growth pace steady.

    Google, in a different way but evenly innovative has lots of growth perspectives too in my mind.

    MSFT and CSCO are measured by there highs reached at bubble times. They never came close to those highs since then. They had there peak and, therefore, are questioned in my mind. IBM facing high debt in comparison is also questioned.

  • Report this Comment On July 21, 2010, at 10:28 AM, uanant wrote:

    how come apple at 260 was called best opportunity of the decade when it was 85 bucks in year 2008. nice sales pitch

  • Report this Comment On July 21, 2010, at 12:19 PM, none0such wrote:

    Check the pharmaceuticals, they may be an even better bet right now as they are unloved and making money.

  • Report this Comment On July 24, 2010, at 4:21 PM, FoolSolo wrote:

    Apple came into my portfolio at $87, and I think there is a little bit left in them, but I've ridden this horse for too long. I've got stops on it at $240, and I'll tighten the noose as it heads north of $260.

    Microsoft is a has been right now, but they are betting big on Cloud computing. Of their $10B R&D budget, about 90% is focused on Cloud. If their bet is good, Microsoft will see a good bounce, any may even be close to a double in about 2-3 years. But if they are wrong, it will hurt, but won't put them out of the game.

    Google is a bit of a wildcard in my opinion. They have diversified into phones, but I'm still somewhat uneasy with their business plan. Visions of AOL. Still, their retreat is a good chance to own one of the exciting young companies in the sector.

    I'm seeing good value in Western Digital and Seagate. They're flush with cash, good revs and margins, but currently trading at near half their highs set late last year. I'm sure there is a good bounce in there, and possibly a run back to new highs in 6-12 months when people realize IT spending is good for disk makers.

    IBM is not a company I'm willing to bet on. Their glory days are waning, and they don't seem to have a lot of excitement in their pipe any more. I don't think they will fade away, but I don't anticipate an explosive rebound.

  • Report this Comment On July 25, 2010, at 11:20 PM, cheaptraveltips wrote:

    No one knows for sure what are the best opportunities, but this is interesting! Glad i read this through.

  • Report this Comment On July 27, 2010, at 3:43 PM, bluewren63 wrote:

    Does anyone have any thoughts on Intel's potential if there is an upswing in tech investment somewhere in the future?

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