The tech sector typically isn't the best place to go hunting for value investments.
Especially considering the best proxy for the tech sector, the Nasdaq Composite, has surged more than 33% in the past year and trades for an earnings multiple north of 21x, technology stocks as a whole don't appear to offer a ton of value.
However, turning the page to individual stocks, there are actually plenty of attractive names in the technology space that could prove attractive as another new year gets under way.
Here's a list of three technology stocks that could be worth consideration for 2014:
1) Intel (NASDAQ:INTC)
Intel's x86 chip architecture missed the boat on mobile to its more power-efficient competitor, ARM Holdings. Worse yet, the PC market went through one of its worst years in recent memory in 2013. The PC market is expected to contract once again in 2014. These factors have done plenty to justify a bottom-barrel multiple for Intel.
But looking past the current misery, there's reason to be at least cautiously optimistic when looking at Intel. New CEO Brian Kraznich has Intel diving headlong into new growth opportunities. Recently, Kraznich took the stage at this week's Consumer Electronics Show to discuss the opportunity Intel plans to attack with the much-discussed Internet of Things. At the CES keynote, Krzanich said "We want to make everything smart–that is what Intel does." Making everyday goods smart is touted as possible a multi-trillion dollar market by as soon as the end of this decade.
And although Intel putting its chips into as many items as possible is only one subplot, it could provide a much-needed growth driver for the struggling semiconductor maker. If so, Intel's current 13x P/E ratio and 3.5% dividend yield will look like a steal, although it's by no means a sure thing.
Hewlett-Packard makes the list by virtue of pure cheapness. With a 10x P/E and dividend yield slightly above 2%, Hewlett-Packard is one of the cheapest large cap tech stocks around. However as is so often the case, Hewlett-Packard is cheap for a reason, even after gaining 75% in the last 12 months.
So should investors expect another big year from Hewlett-Packard? Hewlett-Packard is smack dab in the middle of a multi-year turnaround under CEO Meg Whitman that's helped avert the company from what many thought was to be the demise of one of Silicon Valley's most storied companies.
Although it's unquestionably cheap, it's probably more fair to think of Hewlett-Packard's massive rally in 2013 as more of a "relief rally" than anything else. Extending the time horizon just one year, you can see that Hewlett-Packard had a horrendous 2012, falling 47% over the course of the year and culminated in Hewlett-Packard taking a $8.8 billion dollar writedown of its fated Autonomy acquisition from the year before.
Looking to 2014, the seminal question for Hewlett-Packard should be "where will the growth come from?" And unfortunately from where I'm sitting, that's unclear. So given the bleak outlook of its two key industries (personal computers and enterprise), Hewlett-Packard's valuation seems justified today.
Apologies for the lack of creativity for this pick, but it's simply too hard to ignore Apple's bottom-barrel valuation.
After ditching its shares en masse in the first half of 2013, Apple's stock surged in the second half to end the year slightly above breakeven. And although its days of breakneck growth are probably behind it, Apple's current prices don't reflect its growth opportunities in the year to come.
For starters, China should factor prominently for Apple in a number of ways. Its recent deal with China Mobile should help drive iPhone sales. Additionally, Apple is hard to work expanding its own brick-and-mortar and third party distribution as well. And lastly, Apple also recently opened an online storefront via Alibaba's Tmall online shopping site that should also help users get their hands on Apple's products throughout the entire country. Another key growth driver for Apple could be the introduction of another product line as well, either an iWatch or something else (iTV, perhaps?).
However the critical piece in understand Apple as an investors is that its current valuation hasn't reflected its reasonable, not heady, growth potential going forward. Backing out the roughly $130 billion in net cash on Apple's balance sheet, values Apple's core operations at right around 10x its last 12 months' earnings, what could fairly be argued as a "no growth" valuation. Especially considering the leeway Apple's massive cash stash provides for the possibility of increased capital returns to shareholders, Apple strikes me as simply too cheap today.
Foolish bottom line
Each of these stocks offers investors a bottom-barrel valuation, each for its own unique set of circumstances. However in a sector where cheap stocks are more the exception than the rule, they could certainly be attractive for investors looking to add some value to their portfolios