is it time to buy big cap tech?

Way back when I started managing money in the 1980’s, technology company stocks were revered by institutional and retail investors. The perception was that tech had a much better growth outlook than the overall market. Not surprisingly, tech stocks sold at premium valuations, often twice the price-earnings ratio of the overall market. Back then, and into the 90s, technology companies rarely paid quarterly dividends, and only a handful had stock buyback programs. Investors were content to let them reinvest cash in their businesses. But after the dotcom bubble went supernova, tech valuations crashed and stayed depressed for a long time, even as the strongest survivors of the meltdown grew fantastically and consolidated their holds on their respective sectors.

Despite this trend, I stayed away from big tech stocks like Apple and Cisco and Oracle. After the collapse, I was gun shy, and I’ve historically been suspect of famous stocks with massive market caps. They’re just too heavily covered for comfort. Every analyst and trader from Berlin to Beijing pores over every syllable of every statement they issue. And as the old saying goes, “When the microscopes come out, returns get microscopic.”

But I think it might be time for me to join the herd.

This weekend’s Barron’s has an interesting read, “Cheap Stocks in a Pricey Market,” which includes a handy list of S&P stocks trading below 10x their projected 2014 earnings. And who’s right there near the top of that list? Apple. People can’t unload AAPL fast enough these days:

Apple is in an unfamiliar position as one of the worst performers in the S&P 500 this year, with a 20% decline to $428, and it’s now an outlier because it trades at a discount to virtually every major tech company. Apple changes hands at 9.9 times estimated earnings of $43.37 in its fiscal year ending in September 2014 and yields nearly 3%.

Even with stiff competition in smartphones from Samsung, Apple is still one of the strongest companies out there. It’s earnings should grow ten percent or more in 2014. It also happens to have a staggering $140 billion in cash in its coffers. That’s equal to $153 a share. I never thought I would say this, especially with the insane run-up in its stock over the last decade, but AAPL is starting to look like a downright bargain.

And it’s not alone.

Barron’s didn’t mention them, but both Oracle and Cisco are also going for below market price-earnings ratios at the moment, and each will generate strong revenues of around $40 billion this year, with free cash flow of over $10 billion. Even if–like me–you’re generally reluctant to buy bigger company stocks because it’s harder to find inefficiencies in their prices, Cisco and Oracle are still tempting investments for both yield and potential capital appreciation. Like Apple, they both pay out healthy dividends. Cisco’s is roughly 2.6 percent, and Oracle’s is about 1.5. And they both have boatloads of cash, too–around $35 billion at Oracle and $47 billion at Cisco. That’s not as much cash as Apple has, but then again, almost nobody has as much cash as Apple does.

There’s one more reason I’m strongly considering going big on big tech. Again, I can’t believe I’m saying this, but I’m actually somewhat optimistic that our political leaders will do the right thing when it comes to the corporate tax rate in this country. Even if they don’t lower the rate, there’s a small but potentially very lucrative chance that our do-nothing Congress will at least help American corporations bring back some of the gargantuan amounts of cash they are keeping offshore. It’s a long shot, I know, but a lot of executives I meet with these days are increasingly hopeful that a deal can be reached that both the government and the private sector can live with. Most companies want to repatriate their holdings, but they simply cannot justify it with the current tax laws in place. If things go well in Washington and they are able to bring their money home for a discounted rate, it’s likely that companies like Oracle, Cisco, and Apple will boost their dividends even higher and also buy back big chunks of their stock. That possibility makes their already low stock prices even more tempting.


2 thoughts on “is it time to buy big cap tech?

  1. Pingback: tim cook is right about our tax code | the confessions of a contrarian investor

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