Time for Tech? Yes!

What a year, eh? Not only have the markets been thrust into chaos, but tech stocks, on the whole, are getting obliterated:

Company

YTD Return

Baidu.com (Nasdaq: BIDU  )

(37.0%)

SanDisk (Nasdaq: SNDK  )

(21.8%)

Microsoft (Nasdaq: MSFT  )

(20.4%)

Dell (Nasdaq: DELL  )

(19.6%)

MEMC Electronic Materials (NYSE: WFR  )

(13.1%)

Source: Yahoo! Finance.

The economy could be to blame. Even though emerging tech stocks such as LoopNet (Nasdaq: LOOP  ) are still blowing away expectations, some experts say we're on the verge of a recession.

No question, that's pretty bad news. But is that enough to merit the sector-wide sell-off we're seeing? I'm not so sure. Look at those five stocks once more. This time, we'll factor in their expected growth:

Company

2008 PEG

Baidu.com

0.72

SanDisk

0.81

Microsoft

1.09

Dell

0.96

MEMC Electronic Materials

0.57

Source: Capital IQ, a division of Standard & Poor's.

Now, what if I told you that every single one of these stocks is cheaper than stalwarts General Electric and ExxonMobil (NYSE: XOM  ) ?

It's true. Exxon's 2008 PEG is a heady 1.60. GE is more reasonably priced at 1.32, but still well above the techies. Only Wal-Mart -- a favorite of many cheapskate investors -- is within spitting distance of Silicon Valley's best with a 1.19 PEG.

Did you call tech stocks a value?
Yes, I did. History proves that the best value stocks are often considered high-priced. But, as is often the case, here "high priced" is a relative term that investors frequently misunderstand -- especially when it comes to firms breaking new ground, as Rule Breakers pick Baidu.com has.

For those with the guts to buy, that's an opportunity to seize. Fortunately, many investors do.

A survey in September of 340 investment managers by Russell Investment Group found that a whopping 73% of these pro stock pickers are bullish on tech -- an all-time high. Cheap valuations will do that.

But so will a deeper understanding of these firms, which are responsible for the greatest business enabler in the history of the world -- the Internet. Here's a short course in the natural advantages that many of these firms possess:

  • Once you're in, you're in. Tech firms tend to operate on long-term contracts. Think of Oracle. The database specialist requires its customers to sign up for multiyear maintenance deals after installing its software. That way, it's guaranteed a rich stream of predictable, high-margin revenue, much of which becomes free cash flow.
  • All business is e-business. Name a company. Who's that again? Oh, yeah, I know them. They've got a database. And a few hundred PCs. And a few servers to feed those PCs and two dozen internal and external websites. File cabinets? Nah, they trashed those years ago.
  • A better balance sheet. By virtue of their innovative streak, tech firms are more likely to realize higher margins and, thereby, greater cash flow than your average retailer or manufacturer. So much cash flow, in fact, that they can't ever seem to spend it all. Seriously. Ask Google CEO Eric Schmidt what his plans are for his company's $14 billion war chest.

Grab a cart -- we're going shopping
See my point? Tech is timeless, because all business, in every sector, depends on it. Software, hardware, chips, the Web -- they're all essential elements of a global economy that's hitchhiking on the digital highway, with no intention of turning back.

And now, thanks to Mr. Market's unstable personality, they've suddenly gone cheap. How lucky is that? Very, I'd say. See you at the bargain rack.

This article was first published Nov. 13, 2007. It has been updated.

Fool contributor Tim Beyers writes for Fool.com and the Fool's market-beating Rule Breakers growth stock newsletter service. More than a dozen of the team's picks have at least doubled. Intrigued? Accept a 30-day free pass to Rule Breakers. There's no obligation to subscribe.

Tim owned shares of Oracle at the time of publication. Dell, Microsoft, and Wal-Mart are Inside Value picks. Dell is also a Stock Advisor recommendation. Baidu.com and LoopNet are Rule Breakers recommendations. LoopNet is also a Motley Fool Hidden Gems pick. The Motley Fool's disclosure policy is a rebel with a cause.


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