7 Reasons There's No Tech Bubble

This article is part of our Rising Star portfolio series.

A few weeks ago, a friend of mine asked what I thought about the future of a Facebook IPO. My short response was that retail investors would most likely get in way after the smart money made its way on to the table, so it was hard to recommend a buy.

His response: "Buy, buy, buy!"

Here comes another bubble?
When investors start getting so involved in story stocks and ideas that they ignore fundamentals and valuations, it's very easy for a bubble to form.

And recently there's been an onslaught of tech companies coming to the market or filing with the Securities and Exchange Commission for upcoming IPOs, and the hype around these companies has become quite phenomenal. Take for example, professional-networking site LinkedIn, which almost doubled in value on the first day of trading. Some sources even have Facebook valued close to $100 billion. The list could go on and on, with Chinese and Russian stocks also garnering much attention. It seems as though the allure and prospects of Internet and social networking sites are driving investors to view some stocks through very rose-tinted lenses. So is this the next tech bubble, version 2.0?

I don't think so -- here are 7 reasons why
According to The Economist, legendary investor Warren Buffett recently said this about the formation of bubbles:

"The only way you get a bubble is when a very high percentage of the population buys into some originally sound premise ... that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action. ... People overwhelmingly came to believe that house prices could not fall significantly. And since [property] was the biggest asset class in the country and it was the easiest class to borrow against it created, you know, probably the biggest bubble in our history."

If a true bubble were forming right now, I would think the general population would be scooping up shares of all successful tech companies, sending valuations to absurd values. However, the stock market generally has been down for almost six weeks in a row, and tech stocks are at their lowest levels in more than a decade. According to Businessweek, their price/EBITDA ratio is 1.3 times the S&P average, down from their high of 3.4 in 2000. If the typical investor is caught in a bubble, he/she certainly isn't buying much.

To find evidence of my anti-bubble theory, I ran a screen for large-cap technology stocks trading for P/Es less than 17, had ROEs of at least 15%, and that garnered high marks from our 170,000-strong CAPS investor community. The stocks below were the top seven in my screen:

Source: Motley Fool CAPS as of June 19.

I was certainly surprised to find such amazing stocks show up. Sure, each company has reasons why it might be trading below normal levels. The market wasn't very happy with Applied Materials' announced acquisition of Varian Semiconductor; Cisco has undoubtedly lost focus over the past few years, delving into consumer products and allowing market share to be eaten in its core business segments.

Furthermore, these aren't the high-flying tech stocks of 2011; these are old-guard blue chips whose roaring days are behind them, right? Well, if that's your argument, check out Apple or Google. Each trades for a P/E of less than 19; Apple grew its earnings by a compounded rate of 80% over the past year, and Google by 19%.

Considering that Internet usage is more prevalent now than it was in the 2000s, that smartphones and location-based technology are making some of the above companies very, very important to the overall technology cycle, and that most of the companies above have loads of cash, great credit, economies of scale, and long histories of success, I just don't see how anyone can claim there's a bubble here.

Bubble 2.0? I doubt it. In fact, tech stocks are almost unreasonably cheap right now -- and that's why tomorrow I'll be buying shares of one of those companies for my real-money Motley Fool Rising Star portfolio. Check back in to see which stock made my grade, and get my free commentary and analysis.

This article is part of our Rising Star portfolio series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).