Are Tech Stocks Cheap?
- August 25, 2010
- Dividend Aristocrats, Dividend Investing, Dividend Stocks, Top Dividend Stocks
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The volatile market of 2010 seems to have taken another bearish turn. After losing nearly 1,300 points in May-June, the Dow Jones index staged an impressive rally in July on the back of strong earnings reports. However, the Dow has sunk nearly 500 points in August as small investors flee stocks.
While McDonald’s (MCD: 100.01 +1.41%) and DuPont (DD: 52.01 +1.19%) are having great years, most of the tech stocks in the Dow Jones index are trading near their 52-week lows. Tech stocks typically don’t offer big dividend yields, but value investors are no doubt wondering if this is a unique buying opportunity or just the beginning of another bear market. Are tech stocks cheap or is the worst still to come?
Cisco Systems
Cisco Systems is the only stock in the Dow Jones index that doesn’t pay a dividend. However, we view CSCO as a shadow dividend stock and this is one tech stock that looks cheap. Cisco’s shares have fallen 21% since the end of April and now trade at less than 11x 2011 earnings. That is incredibly cheap for a tech stock that is expected to grow revenues by double-digits.
Microsoft
The Dark Empire has drawn an increasing amount of flack lately for their stagnant stock price. Investors have been clamoring for a dividend increase from Microsoft. MSFT will probably end up caving to investor pressure and increase their dividend this fall. Increasing their current 2.1% dividend yield along with an attractive valuation of only 9x next year’s earnings makes Microsoft look cheap as well.
Hewlett-Packard
Hewlett-Packard has been in the news for all the wrong reasons the past few weeks. The company fired CEO Mark Hurd following sexual misconduct allegations. Now the leaderless tech giant is in a bidding war with Dell (DELL: 17.66 +0.34%) over 3Par (PAR: 4.75 +0.64%). While HPQ looks cheap at only 8x 2011 earnings, the stock pays a minimal dividend that hasn’t been increased since 1998. HPQ may be a cheap tech stock, but it’s hard to see why investors should consider Hewlett-Packard right now.
IBM
Big Blue’s stock price has held up admirably despite the market’s volatile turns the past few months. Sure the stock is down 4% this year following last year’s sensational 55% increase, but it is still outperforming its peers. IBM has moderate growth prospects and an average 2.1% dividend yield. Since IBM has held up so well this year, it’s hard to consider it a cheap tech stock.
Intel
Along with Cisco, it’s hard to image why Intel has fallen to a 52-week low right now. In July, the chip maker reported the strongest quarter in the history of the company. In fact, both their first and second quarter earnings have blown past Wall Street’s expectations. The company also raised their guidance following each quarter. Intel also sports the highest dividend yield among the tech stocks in the Dow at 3.4%. Revenues are expected to grow 27% this year and yet INTC trades at less than 9x 2011 EPS estimates.
So are tech stocks cheap? Cisco Systems and Intel certainly look attractive at their current levels. Hewlett-Packard, Microsoft and IBM are less compelling, but you could argue that they are also cheap based on their P/E ratios and dividend yield.
