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Dale Jackson

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The widows and orphans of tech

Dale Jackson

What do sub-prime mortgages in the United States and the global technology sector have in common? Not a heck of a lot.

But try telling that to investors who have been rushing to the nearest exit each time a financial institution reports it may not have enough money to cover some its high-risk debt investments.

When fear gripped the market back in mid July the broad equity sell-off devalued major U.S. Indexes by 10 per cent within a month - and in what can be described as blind selling, the Nasdaq 100 went right down with it. As cooler heads prevailed the Nasdaq began reclaiming some of those losses but not before leaving a few lost and unloved blue-chips behind.

That’s not to suggest there’s no connection between the shrinking supply of liquidity and the technology sector. In the first place, panic selling triggered by anything - including the sub-prime situation - knows no bounds. On a more practical level tech is still viewed by many as a growth sector and growth cannot occur without easy access to cheap money. However, there are a few degrees of risk-separation including hedge funds, the bond market, financial services stocks and small caps.

Judged on their individual fundamentals some of the tech sector’s heaviest hitters have clearly been wronged. Reported and expected earnings for the 100 largest companies on the Nasdaq have been strong lately - so strong that the Nasdaq 100 is only trading at about 33 times earnings.

That’s a far cry from the heady days of the tech bubble when earnings were often non-existent and multiples were in the hundreds on speculation big profits were on the way. In other words the falling prices of those 100 blue-chip tech stocks and their rising earnings have narrowed the gap between the dreams of investors and reality. It’s been a slow and steady climb for large capitalization technology earnings.

The gap has narrowed for some more than others. In late August, Dell Inc., the second largest maker of personal computers now in the midst of restructuring, blew away expectations by posting a second quarter profit of $733-million (U.S.). Investors were too nervous to push the stock up much more than 1 per cent. By mid September, Dell stock was trading at a price-to-earnings multiple of 20.1 times - a multiple more common on a large cap, dividend-paying, low growth, old economy stock.

Dell is expecting the strong earnings to continue. If you factor in expected earnings for the year ahead, the company’s stock is trading at about 18.8 times earnings. A recent report by Pacific Crest Securities analyst Brent Bracelin says Dell should return to growth next year.

If you compare stock prices with earnings per share the bargains get even better for companies like biotech giant, Amgen Inc. In mid September shares in the cancer drug maker were trading at 14.2 times last quarter’s earnings, and 13.4 times earnings for the year ahead. Despite that the stock was down about 17.5 per cent for the year.

Another cheap stock that isn’t far behind Amgen is Teva Pharmaceutical Industries Ltd. The price of the generic drug maker’s stock is about 16 times last quarter’s earnings and 19.1 times earnings for the year ahead.

Many investors still associate Microsoft with ballooning multiples and sky-high valuations. In mid September the world’s largest software maker was trading at less than 20 times earnings and 16.7 time forward earnings.

Other tech bargains as of mid September include software maker Oracle Corporation with a trailing price-to-earnings ratio of 20.5 times and an estimated P/E of 17.2 times.

Biopharmaceutical giant Gilead Sciences Inc. is trading at 24.4 times trailing earnings and 22.6 times forward earnings even though its stock is up 17.5 per cent year-to-date.

Digital wireless provider Qualcomm Inc. trades at 23.4 times last quarter’s earnings and 20.1 times its expected earnings for the coming year.

That’s not to say all Nasdaq 100 stocks are in the bargain basement bin. Canada’s sweetheart - maker of the Blackberry - Research in Motion Limited is no cheap date. As of mid September RIM was trading at 68.8 times earnings after investors more than doubled its share value since January. A more modest earnings outlook has lowered RIM’s forward P/E to 43.8 times.

Computer maker Apple Inc. has seen its share price rise over 63 per cent so far this year thanks to the continuing success of its iPod related products. That puts the company stock over the Nasdaq 100 average at 39.2 times trailing earnings and 37.3 times forward earnings.

Search engine Google Inc. is on a wild popularity ride trading at 46.7 times trailing earnings and 35 times forward earnings, while eBay Inc. is bidding up its share price to 34.4 times past earnings and 27.6 times future earnings.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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