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Tech Stocks Research: Are Tech Stocks Finally Cheap?

By Dr. Steve Sjuggerud, Chairman, Investment U
Thursday, June 9, 2005: Issue #443

Intel (Nasdaq: INTC) traded at $145 a share in March of 2000 at the peak of the Nasdaq bubble. The stock soon split in half, and today – more than five years later – Intel sits at a lowly $27 a share.

Is Intel finally cheap? And are tech stocks in general finally cheap? Today we’ll take a look

Intel Adds $2 Billion a Year in Profits, and the Stock Goes Nowhere

Intel made $3.1 billion in profits in 2002. The next year, it increased its profits by over $2 billion, to $5.6 billion. And for the full year 2004, Intel increased profits by just under $2 billion again, this time reporting $7.5 billion in profits.

Now, you might think that increasing your profits by a few billion dollars each year would mean something to Wall Street. But in Intel’s case, it hasn’t.

Shares of Intel are cheaper today than they were at the beginning of 2002, when this string of years of by a few billion each year began.

So What’s Going On? It’s Time To Do Some Tech Stock Research

I ran a little experiment. I went back seven years, researching dozens of major tech stocks. My hope was that seven years of data would include both the booms and the busts in tech stocks, and we’d arrive at some conclusions. Boy, did we

The first conclusion from my research is that major tech stocks today are about 50% cheaper than their seven-year averages.

Importantly, I’m not looking at prices here, I’m looking at values. Specifically, I’m looking at two valuation measures: the price-to-sales ratio and the price-to-book ratio.

Let’s take Intel as an example. Intel’s seven-year average price-to-sales ratio is about seven. But today, shares of Intel trade at a price-to-sales ratio of less than five. The results for book value are similar Intel’s seven-year average price-to-book value has been about six. And today it’s about 25% less than that. When we combine these two together, shares of Intel are roughly 29% cheaper than their seven-year average.

So at first glance, big tech stocks like Intel look cheap. For checks and balances, I wanted to research the last three years as well. That way, we’re starting well past the end of the Nasdaq bubble, and we’re hopefully back to “normalcy” (whatever that is in tech). I was wondering: Are tech stocks cheaper today than they’ve been on average over the last three years? The answer is no

The table below tells the story:

Current Tech Stock Values Relative To History

Company	Ticker	Value vs 7-year avg	Value vs. 3-year avg
Microsoft Corporation	MSFT	-43%	1%
Intel Corporation	INTC	-29%	-8%
Cisco Systems, Inc.	CSCO	-53%	-8%
Nokia Corporation (ADR)	NOK	-42%	4%
Hewlett-Packard Company	HPQ	-46%	8%
Oracle Corporation	ORCL	-49%	-24%
QUALCOMM, Inc.	QCOM	-24%	13%
Yahoo! Inc.	YHOO	-68%	37%
EMC Corporation	EMC	-62%	6%
Sun Microsystems, Inc.	SUNW	-74%	-27%
Nortel Networks	NT	-55%	-35%
Broadcom Corporation	BRCM	-65%	-8%
Network Appliance, Corp.	NTAP	-49%	19%
MEDIANS		-49%	1%

Tech Stock Research Conclusions:

Major tech stocks appear cheap at first glance when you compare them with their seven-year average valuations. However, that seven-year period includes the great Nasdaq bubble and bust.

When you compare the values of major tech stocks versus their three-year averages, they don’t look nearly as cheap. Major tech stocks are basically in line with their three-year averages.

For me – someone who’s not an expert in technology – this is not cheap enough to be willing to speculate. I’ll buy something when it’s extremely cheap and out of favor.

If I don’t have a competitive advantage in something (like Intel, for example), then I’ll hold off on buying until it is extremely cheap and hated. That gives me the margin of safety I need to cover my risk of not being an expert in Intel.

As you might guess, I’ve never bought Intel before in my own account. It’s never been cheap and hated enough for me to roll the dice.

I was hoping this little number-crunching exercise in researching tech stocks was going to show me that the major techs are finally getting cheap enough for me to start getting interested. After all, Intel’s earnings have increased by $2 billion a year the last few years, and yet the stock price is lower today than it was when that earnings run started.

My ultimate conclusion is that – at least for me – we’re not there yet. While tech stocks have gotten cheaper, the stock prices are not quite cheap enough for me to have sufficient margin of safety to protect me from my own tech ignorance. So I’m standing aside.

I may miss out on some profits, of course. But tech stocks aren’t irresistible yet, and I’m patient with my investments. I’m not buying.

Good investing,

Steve

Today’s Investment U Cribsheet