Some Tech Stocks Looking Like a Good Deal to ‘Value’ Investors

Is technology ugly enough to love yet?

Even Wall Street’s biggest cheapskates, “value” investors who have considered most technology stocks overpriced for years, are starting to see some bargains in the beaten-down sector.

These money managers still consider a Qualcomm or a Cisco Systems expensive despite their tumbling 61% and 32%, respectively, from their record highs.

But they are glad to pick up a Computer Associates, for example, at a time when the world’s third-largest software company is in deep disfavor and its price is only 13 times analysts’ consensus earnings estimate for this year.

The estimated 2000 price-to-earnings ratio for the blue-chip Standard & Poor’s 500 index, by contrast, is around 24.

Meanwhile, some stock pickers who are willing to pay higher prices for companies with strong growth prospects consider much of the technology sector a “buy.”

If you liked wireless technology giant Qualcomm in January at $200 a share, the argument goes, you have to love it at $76.75, where it closed Wednesday.

Investors of all persuasions suddenly poured into tech stocks Wednesday, turning a 121-point morning loss on the Nasdaq composite index into a 106-point, 3.4% gain.

And for the first time since April 18, Nasdaq trading volume exceeded 2 billion shares.

It may be weeks or months, of course, before anyone knows if this was a real turning point or just another in a two-month-long series of failed attempts to reignite the tech bull market.

With the Federal Reserve expected to continue raising interest rates, many stock strategists believe there is more pain ahead.

Stanley Nabi, vice chairman of DLJ Asset Management in New York, thinks there is “still another shoe to fall.” A panic sell-off, perhaps induced by a bad inflation report or a too-strong economic-growth number, could chop the Nasdaq index to 2,500, a further 24% drop, he said.

But with some of the most popular tech stocks down 50% or more from their peaks, he and other money managers are already buying.

Nabi said he just added some “neglected names” to his portfolio, including Computer Associates, information services firm Unisys and business software provider Progress Software. He may snap up Microsoft and Hewlett-Packard if they slide a little more, he said.

Of Microsoft, perhaps on the verge of being broken up by the government, Nabi said, “Eighty percent to 85% of the risk is already out of it.”

Another fan of Computer Associates is Alec Cutler, a portfolio manager at value-oriented Brandywine Asset Management. He likes it in part because he thinks its management is great, it often produces positive earnings surprises, and its future isn’t “leveraged to the ‘dot.coms.’ ”

But mainly he likes it because so many people hate it.

The same goes for other tech firms that Cutler said never quite caught the eye of momentum traders--names like Synopsys, a supplier of electronic design automation services; Ceridian, an information-management firm; and Symantec, which makes security software and other products. All three trade at a fraction of the P/E multiples of the hottest tech stocks.

That’s when he wants to buy, Cutler said--when “people say, ‘This is done, it’s toast, it’s over, it’s mature.’ ”

Semiconductor-equipment makers such as Teradyne and Novellus Systems have fallen almost enough to be attractive, Cutler said.

Now is the time for tech investors to “rationally separate the wheat from the chaff,” said Philip Orlando, chief investment officer for Value Line Asset Management in New York.

Orlando thinks stock P/Es are meaningless without relating them to companies’ growth prospects. By that measure, he said, stocks such as Cisco, Qualcomm and Sun Microsystems are dramatically oversold.

“These stocks are screaming buys right now,” Orlando said, arguing that they are growing two or three times as fast as typical S&P; firms, and therefore can justify above-average P/Es.

Earnings estimates always have to be viewed skeptically, Orlando said--they’re analysts’ educated guesses, after all--but he argued that many tech leaders will be less vulnerable than old-line industrials to earnings shortfalls if the Fed succeeds in slowing the economy.

Veteran value-stock manager David Dreman has owned stocks such as Intel and Texas Instruments in the past, but you still can’t get them today at P/Es anywhere near 20, which is where he likes to shop.

Dreman is patient, though. There’s plenty of time for a further tech collapse, he reasons.

“I have a feeling that tech is going to be one of our biggest holdings in a year to 18 months,” he said, “but it’s still a little early.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Cheap Enough Yet?

Here’s a look at what analysts expect some technology companies to earn, per share, in 2000 and 2001, and the stocks’ price-to-earnings (P/E) ratios based on those estimates.

*--*

Wed. Est. EPS: Est. P/E: Stock (ticker symbol) close 2000 2001 2000 2001 America Online (AOL) $51.00 $0.38 $0.54 134 94 Applied Materials (AMAT) 78.44 2.26 3.26 35 24 Ceridian (CEN) 24.38 1.01 1.24 24 20 Computer Assoc. (CA) 51.00 3.82 4.55 13 11 IBM (IBM) 109.63 4.35 4.97 25 22 Intel (INTC) 117.38 3.03 3.50 39 34 Microsoft (MSFT) 65.56 1.69 1.87 39 35 Novellus Systems (NVLS) 43.13 2.10 2.72 21 16 Qualcomm (QCOM) 76.75 1.08 1.41 71 54 Progress Software (PRGS) 15.75 1.04 1.25 15 13 Sun Microsystems (SUNW) 76.38 0.96 1.20 80 64 Symantec (SYMC) 64.19 2.60 3.09 25 21 Synopsys (SNPS) 44.75 2.57 3.37 17 13 Teradyne (TER) 70.50 2.96 3.81 24 19 Unisys (UIS) 24.94 1.78 2.15 14 12 S&P; 500 1,399.05 57.53 63.50 24 22

*--*

Note: Earnings per share (EPS) estimates are for fiscal years most closely aligned with calendar years shown. But America Online, Microsoft and Sun Microsystems estimates are for periods ending June 30.

Sources: Bloomberg News, Zacks Investment Research, IBES International