This article was published in the March issue of Money magazine.
The tech-heavy Nasdaq index may be nearing its early-2000 levels, but the technology sector looks nothing like it did in the bubble years.
For starters, these shares are no longer absurdly valued. In fact, they trade at lower price/earnings ratios, based on projected profits, than the broad market. And many old-guard names are downright unloved, making them targets for value-minded investors.
Tech is also less volatile than most other sectors, which isn't that surprising since this group has matured and is now filled with conservatively run businesses. About 40% of the cash on the balance sheets of S&P 500 companies is now held by tech firms. And they are rewarding shareholders with that money. Forty-four of the 65 tech stocks in the S&P pay dividends, and 22 yield more than 2%.
"Back in 1999, I never would have thought that some of the large techs would eventually look like widow-and-orphan stocks," says David Rolfe, manager of the RiverPark/Wedgewood Fund. He and other fund managers say the following shares are good bets for risk-averse investors:
Go with big tech
Cisco Systems (CSCO) is synonymous with the Internet, but its switching and routing business is no longer sizzling. Not a problem. Investors haven't been giving this tech giant enough credit for expanding into growth areas like networking gear for security, video, and wireless, says Patrick Kaser, a portfolio manager with Brandywine Global. Cisco is also pushing into IT services, where sales growth is stronger than in hardware. "This is a hated stock in a business that has not collapsed and has interesting opportunities," Kaser says.
Microsoft (MSFT) is similarly unloved because investors feel that former CEO Steve Ballmer missed the boat on mobile. Overlooked is the company's steady and strong corporate business, where revenues from software sales for servers and data centers have been growing more than twice as fast as Microsoft's consumer business.
Pat Becker Jr., president of Becker Capital Management, thinks Microsoft isn't too late to the cloud software party either. The company's cloud revenues doubled in its most recent quarter. It's that type of growth that helped Microsoft nearly double its dividends in the past four years.
Focus on low tech
Making hard drives isn't cutting-edge, but the industry is improving through consolidation. Seagate (STX), whose shares have benefited from this trend, clearly stands out.
Seagate's dividend yield, for instance, is double that of top rival Western Digital (WDC). While both stocks trade at a P/E of around 11, Seagate's expected earnings growth rate is substantially higher than Western Digital's. And that growth should remain solid as Seagate, which Kaser favors, enjoys increased demand for storage -- especially for tablets, other mobile devices, and servers to support cloud computing.