High Tech Bargains For Investors To Consider

 |  Includes: CSCO, HON, IBM
by: Elliott Gue

Investors who lost money when the tech bubble burst in the late 1990s may not associate technology shares with a value-oriented investment strategy. But on a price-to-earnings basis, the Nasdaq 100 trades at an 11% premium to the S&P 500 - compared to a long-term average premium of about 40%. Yet the tech sector boasts superior growth prospects: Over the past two quarters, earnings growth for tech stocks in the S&P 500 has more than doubled that of the whole index.

Information technology giant IBM (NYSE:IBM) has done well in 2011. The company primarily sells services and software to large multinational corporations - a customer base that boasts historically large net cash positions and can borrow money at near record-low interest rates.

Many of the services IBM offers cut costs or are considered critical to business. The company also consults with clients to develop systems and software that address their business-specific needs. Sales of services and software products often involve ongoing maintenance contracts that produce recurring revenue.

In contrast, networking equipment giant Cisco Systems (NASDAQ:CSCO) has disappointed in the past few years. Despite solid demand for its switches and routers, Cisco Systems has lost market share to rival Juniper Networks (NYSE:JNPR) and reported lackluster quarterly earnings.

My colleague Jim Fink astutely called Cisco’s bottom in his August 2011 InvestingDaily.com article, Cisco Systems Has Bottomed, and he appears to be correct. Management in September outlined a series of initiatives and cost-saving measures that have cheered the market. The company will eliminate underperforming or non-core product lines and focus on higher-margin businesses such as the firm’s video and web conferencing services and equipment.

Growth forecasts for the company’s switches and routers business were too optimistic a year ago. But conservative expectations will make it easier for Cisco Systems to beat Wall Street’s estimates.

Shares of Honeywell International (NYSE:HON) fell more than 25% in the third quarter. But this sell-off is overdone. Honeywell International’s two largest business segments - aerospace avionics and automation and controls - account for more than 70% of sales. Although air passenger and freight traffic growth remains lackluster in the developed world, demand for Honewell’s products should remain robust in emerging markets. Air carriers now run fuller schedules with existing planes, driving demand for replacement parts, a major business for Honeywell International.

The automation and control unit sells a litany of products aimed at manufacturers. The U.S. Manufacturing Purchasing Managers Index has remained above 50 this year, indicating that activity in this sector continues to expand. Furthermore, many of Honeywell International’s products improve energy efficiency and reduce costs, goals that become even more pressing if economic growth cools.

Trading at about 12 times earnings, Honeywell International’s stock is at its cheapest level since mid-2009, when the economy was mired in recession.

Disclosure: I am long IBM, CSCO, HON.