Time for Tech? Yes!

What a year, eh? The markets been thrust into chaos, and tech stocks are largely getting obliterated:

Company

YTD Return

VASCO Data Security (NASDAQ:VDSI)

(52.4%)

Juniper Networks (NASDAQ:JNPR)

(30.3%)

ValueClick (NASDAQ:VCLK)

(22.7%)

Seagate Technology (NYSE:STX)

(21.3%)

Nokia (NYSE:NOK)

(16.1%)

Source: Yahoo! Finance.

The economy could be to blame. Even though classic tech stocks such as Research In Motion (Nasdaq: RIMM  ) are still blowing away expectations, there's evidence that things are about to get a whole lot worse.

That's unquestionably bad news. But is that enough to merit the sectorwide 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

VASCO Data Security

0.73

Juniper Networks

0.97

ValueClick

1.14

Seagate Technology

0.57

Nokia

1.20

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

Now, what if I told you that every single one of these stocks is cheaper (relative to its potential) than stalwarts Johnson & Johnson (NYSE: JNJ  ) and Procter & Gamble?

It's true. J&J's 2008 PEG is a heady 1.69. Procter & Gamble is more reasonably priced at 1.52, but still well above most of the techies. Even Wal-Mart -- a favorite of many cheapskate investors -- can't touch tech's best with its 1.35 PEG. (I should note here that those PEG ratios will look worse if a prolonged downturn slows tech spending growth.)

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

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

A Russell Investment Group survey of 340 investment managers last September 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 top tech 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:

  1. 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.
  2. 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.
  3. A better balance sheet. By virtue of their innovative streak, tech firms are more likely to realize higher margins, and thus 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 Apple CEO Steve Jobs what his plans are for his company's $18.4 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 cheaper. How lucky is that? Very, I'd say. See you at the bargain rack.

Fool contributor Tim Beyers writes for Fool.com and our market-beating Rule Breakers growth investing service. Ten of the team's picks have at least doubled since the newsletter's inception. See them all with a 30-day free pass to Rule Breakers.

Tim owned shares of Nokia, Oracle, and Seagate at the time of publication. Wal-Mart is an Inside Value pick. Johnson & Johnson is an Income Investor recommendation. Apple and VASCO Data Security are Stock Advisor selections. The Motley Fool's disclosure policy is a rebel with a cause.


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