Now that decades have passed since the beginning of the computing and internet revolutions, the tech sector has lost its allure. This fall from grace is apparent in how the firms of the SPDR Technology Selector Fund (XLK) and the companies of the S&P 500 (SPY) have the same 14 P/E ratio (ttm). Apparently, tech has lost its luster and the sector has the same valuations as the broader stock market.
Investors can seize the opportunity offered by these strange times by investing in tech stocks that are priced as value investments:
Hutchinson Technology Inc. (HTCH) produces precision assembly magnet assemblies for disc drives and medical applications. The firm has not had positive earnings since the 2007 fiscal year. Despite these paper losses, Hutchinson generated positive operating cash flows and mixed total cash flows over the last four years. Hutchinson has a current ratio of 4.48, reflecting ample capacity to pay bills in the coming year. In light of these financial metrics and cost-saving restructuring initiatives, liquidity does not seem to be an issue and the firm is likely to survive for years to come.
Instead, HTCH stock is a compelling way to buy technology assets on the cheap. The firm is clearly solvent, with a P/E ratio of 0.65. This firm is an extreme value play with a P/B ratio of 0.33, allowing investors to invest in the firm’s net assets at 1/3 the accounting value of the firm’s net assets. Investing in HTCH is a bet that the company will either become profitable in the long term or will be acquired by a buyer at a price that is closer to its book value.
The tech giant Advanced Micro Devices, Inc. (AMD) is another tech value play. This company is Intel’s (INTC) primary competitor, and is more attractively priced than Intel. AMD manufactures microprocessors, chipsets, and embedded processor products for various industries. It is attractively priced with a P/E ratio of 7.89, a P/S ratio 0.68 and a P/B ratio 2.87. Currently, Intel stock trades at a higher P/E ratio of 10.81 and a higher P/S ratio 2.62.
The market is discounting AMD largely because its board has yet to find a permanent CEO after 1.5 years of searching. In reality, this is something of a non-issue. It pays to wait: as long as Thomas Seifert is on double duty as CFO and interim CEO, the company saves a (roughly $3 million) hefty executive compensation package. Moreover, the value of CEO “executive vision” is overrated, if not imagined. Unless there is overwhelming evidence to the contrary, a naked emperor has no clothes. In short, being without a permanent CEO is a win-win situation: AMD will continue to save money or shares will increase in value when a new CEO is named. We think AMD represents an equally good opportunity when compared with Intel Corp. due to AMD's comparable technology.
Value can also be found in smaller tech companies. Alliance Fiber Optic Products Inc. (AFOP) manufactures fiber optic materials and networking devices for customers across the globe. This microcap stock trades at a P/E ratio of 11.88, a P/S ratio of 1.58, and a P/B ratio 1.24. 32.49% of shares are held by insiders, and over the last six months insiders have increased their holdings in the company by 19.65%. Outside investors should follow insider investing as an indicator of the health of a company's internal operations. By this measure, AFOP is doing well.
The tech sector also affords opportunities to buy growth at very reasonable prices. For example, Electro Scientific Industries Inc. (ESIO) has innovated laser-based LED manufacturing, increasing LED brightness while reducing costs, hazards, and environmental impact of production. The P/E ratio over the last 12 months was 70.71, but the P/E ratio is forecasted to be 15.84 for the next year. Other valuation metrics show that this is attractively priced: it has a P/S ratio of 2.21 (ttm) and a P/B ratio of 1.55. ESIO is a cheap way to take a stake in new technology for green LED manufacturing.
ON Semiconductor Corp. (ONNN) is another company that is attractively priced with high expected growth. ONNN manufactures semiconductor components for clients across diverse industries including mobile devices, automobiles, LEDs, and medical devices. ONNN stock trades at a 13.87 P/E multiple and a 1.51 P/S multiple (ttm), and has a reasonable P/B ratio of 2.67. These valuations are fair, but the stock is highly attractive in light of its five year analyst growth projections, which give it a PEG ratio of 0.53.