Promod Radhakrishnan

A Rare Buying Opportunity in the Tech Sector

CSCO earnings report today is going to add to this short term pain. I dont think the entire sector's going for a prolonged slump though. Especially MSFT, GOOG - there's enough inherent strength in their business models to make them attractive at current levels even in a slow market. Downside risks in AAPL might be higher in the short-to-medium term though.

A Rare Buying Opportunity in the Tech Sector

techy:
I agree with you on the nature of this article! I hold on to the view despite the CSCO earnings report!

Let's take a look at these stocks individually:

1) MSFT has been sustaining a revenue and EPS growth of over 24% over multiple quarters. Assuming a PEG of 1 on forward earnings, you are looking at a EPS growth of 18 to price the stock at 31+. I do not think the slow down/recession is going to be as bad that MSFT gets hit worser than that!

2) AAPL - Phenomenal EPS growth over the past quarters due to block buster cutting edge products and high margins. Revenue growth of 28%. At 120-125, the stock is priced at a PE of ~28. If you really hold a negative view on the economy, i would agree this one holds some medium-term risk. However, i dont see much of a risk on a 12-18 month horizon.

3)GOOG - EPS growth of over 50%+ consitently over past quarters. At a PE of 38 at 495 levels, this one's holding the least amount of risk among the 3 - again by a classic PEG=1 thumbrule. I do not believe a revenue stream of online advertising would be as affected by a slow down as compared to TV or other media advertising.


Finally, the calls you take on these stocks - short term or long term depends on your risk appetite and view on the economy. Short or medium term, the judgements are debatable, especially on AAPL. Long term (12-18 months) risk is very low on these stocks at current levels.

My 2008 Investment Prognosis

KO, PG, JNJ, MO are all long-term bets over a 6-12 month period of sustained slowdown...its an old theory, where non-cyclicals do well in periods of down turns. GG might see intermittent spikes, but depending on your view on commodities over the next 2-3 quarters (I am bearish to neutral), it would correct. Eitherway, its going to be a very volatile ride for folks holding Newmont, Goldcorp etc.