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:


YTD Return

Sigma Designs (Nasdaq: SIGM  )


VASCO Data Security


Google (Nasdaq: GOOG  )


Cisco (Nasdaq: CSCO  )


Oracle (Nasdaq: ORCL  )


Source: Yahoo! Finance.

The economy could be to blame. Even though budding tech titans such as Gmarket (Nasdaq: GMKT  ) are still blowing away expectations, there's evidence that conditions are about to get a whole lot worse.

That's unquestionably bad news. But is it 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:


2008 PEG

Sigma Designs


VASCO Data Security








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 Johnson & Johnson and Procter & Gamble?

It's true. J&J's 2008 PEG is a heady 1.73. Procter & Gamble is more reasonably priced at 1.59, but that's still well above most of the techies. Even Wal-Mart (NYSE: WMT  ) -- a favorite of many cheapskate investors -- can't touch tech's best with its 1.47 PEG.

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

Those with the guts to buy can seize this opportunity. Fortunately, many investors do.

A September survey 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 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, 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 Apple (Nasdaq: AAPL  ) CEO Steve Jobs what his plans are for his company's war chest -- which now stands at $19.4 billion.

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, 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 also writes for the Fool's market-beating Rule Breakers growth investing service. Eleven 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. Wal-Mart is an Inside Value pick. Johnson & Johnson is an Income Investor recommendation. Apple and VASCO Data Security are Stock Advisor selections. Gmarket and Sigma Designs are Rule Breakers recommendations. The Motley Fool's disclosure policy is a rebel with a cause.

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