Finding Value in All the Tech Places

Getting nervous about the stock market? With GMO's Jeremy Grantham saying it's time to start selling, maybe you should be. Personally, I prefer value stocks to growth stocks when it's time to reduce risk. The low P/E ratio leaves less room to fall, and a fat dividend yield can provide a welcome cushion.

Lately, some of the biggest names in tech look a lot like value stocks. Compared to an S&P 500 index ETF, International Business Machines (NYSE: IBM  ) , Microsoft (Nasdaq: MSFT  ) and Intel (Nasdaq: INTC  ) all have lower P/E ratios and higher dividend yields. They've turned in pretty respectable EPS growth over the last year, too:

Investment

P/E

Dividend Yield

Last 12 Month EPS Growth

2011E EPS Growth

SPDR S&P500 Index ETF (SPY) 14.5 1.7% 32% 17%
Intel 10.7 3.1% 96% 10%
Microsoft 9.6 2.6% 30% 13%
IBM 14.1 1.8% 16% 15%

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

What's the catch? At all three companies, EPS growth is expected to slow until it lags that of the S&P 500 index overall. Nonetheless, all three are expected to produce double-digit EPS growth in 2011. Many investors are shunning Microsoft and Intel as the success of Apple's (Nasdaq: AAPL  ) iPad tablet dampens the outlook for PC growth. Time will tell whether those fears are overdone. IBM, in my view, is a great company that Wall Street has only recently started to appreciate.

In contrast, Hewlett-Packard (NYSE: HPQ  ) and Cisco Systems (Nasdaq: CSCO  ) are encountering some challenges of their own making. HP lowered fiscal 2011 guidance on May 17, citing the need to boost investments in services, among other issues. Cisco's troubles started last year, and they've since deepened to the point that analysts now forecast an EPS decline in 2011. These two turnarounds may be value traps.

Investment

P/E

Dividend Yield

Last 12 Month EPS Growth

2011E EPS Growth

SPDR S&P500 Index ETF (SPY) 14.5 1.7% 35% 17%
Hewlett-Packard 8.8 0.9% 16% 2%
Cisco Systems 12.7 1.5% 9% (7%)

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

Apple also deserves a mention in an article about attractively valued tech stocks, even though its P/E ratio exceeds the S&P 500 index's P/E, and Apple pays no dividend. Apple's 15.9 P/E simply doesn't reflect its stunning EPS growth -- nor the expectations that such growth will continue. Onetime tech darling Google, however, trades at a much richer P/E, despite far less impressive historical and forecasted EPS growth.

Investment

P/E

Dividend Yield

Last 12 Month EPS Growth

2011E EPS Growth

SPDR S&P500 Index ETF (SPY) 14.5 1.7% 35% 17%
Apple 15.9 0% 78% 69%
Google 20.1 0% 17% 14%

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

Foolish takeaway
Investors looking for inexpensive tech plays will find no shortage of attractively valued tech titans. That said, some are cheap for good reason.

What do you think: Will slow PC growth continue to pressure Intel and Microsoft? Can Cisco and HP turn their businesses around? The Motley Fool's free new My Watchlist feature offers an easy way to stay on top of market developments. You can get up-to-date news and analysis by adding these stocks to your Watchlist now:

The Motley Fool owns shares of International Business Machines, Apple, Intel, and Microsoft, has bought calls on Intel, and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Intel, Cisco Systems, Apple, and Microsoft, and recommended creating a bull call spread position in Apple and a diagonal call position in Microsoft and Intel. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Cindy Johnson owns shares of Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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