Are tech stocks safer now?

One of the most-quoted maxims about investing is "buy when there's blood in the streets." So it's not surprising that investors are re-entering the battered market in search of deals.

Another saying is "buy boring." So it's also not surprising that bargain hunters still shun tech stocks, even though a lot of them look dirt-cheap. After all, the tech sector has a history of volatility that makes it look a lot riskier to the faint of heart than, say, big consumer-mainstay companies such as Procter & Gamble (PG, news, msgs).

When tech stocks are discussed, investors may want to remember the first maxim and forget the second.

Those dismissing tech stocks as too risky in a downturn may miss out on one of the markets' biggest buys. Though it's true that tech companies have historically high betas -- a measure of volatility -- there are several reasons tech giants such as Intel (INTC, news, msgs), IBM (IBM, news, msgs) and Hewlett-Packard (HPQ, news, msgs) are safer bets now than supposedly low-risk names like General Electric (GE, news, msgs).

Are tech stocks a good buy?

What is Beta?

Low debt warrants higher prices

For one thing, tech companies typically don't require short-term loans to finance their operations. Tech giants such as iPod and iPhone maker Apple (AAPL, news, msgs), software giant Microsoft (MSFT, news, msgs) and network equipment supplier Cisco Systems (CSCO, news, msgs) have historically funded their businesses with the billions in profits already on their balance sheets. (Microsoft is the publisher of MSN Money.)

Is tech safer now?

Even relatively small tech companies tend to control debt and maintain cash cushions to shield operations from the boom-and-bust cycles all too common in the technology sector. That's important during an economic crisis fueled by many banks' unwillingness to grant loans at affordable interest rates.

Low debt puts tech companies in better positions to continue expanding. Even if the government's plan to thaw the credit market succeeds in short order, it will still take a while for businesses to obtain the loans they need. During that lag time, low-debt tech companies will still be able to fund research and development, acquire attractive companies and fund aggressive operations while other companies wait for loans.

"People are talking about the thawing of credit markets, but it is still going to take days, weeks and months for that to happen," says Scott Kessler, the senior director of tech-sector research for Standard & Poor's. "And a lot of tech companies are self-funded and not getting hit by increases in interest rates for short-term lending."

Relatively low debt also gives tech companies more flexibility in this down market to take actions to boost their share prices and improve their long-term prospects. For example, Microsoft announced in September that it would repurchase $40 billion of its stock and raise its dividend to investors. Most companies would have found it difficult to make such a move. But with more than $21 billion in cash and short-term investments on its balance sheet and a history of never taking on debt, Microsoft didn't have a problem committing such a sum and took on debt for the first time to improve its share price.

Chip maker Intel announced Oct. 15 that despite an uncertain business outlook, it is largely maintaining its investments in research and development. Intel can do that, in part, because it has plenty of cash. The company posted net income of just more than $2 billion in the most recent quarter, a gain of more than 12% from the same quarter last year, and had more than $12 billion in cash and equivalent investments on hand as the quarter finished.

"Large-cap tech stocks have tons of cash and are investing in a downturn, which shows they are going to emerge stronger than when they entered it," says Tim Boyd, an analyst for American Technology Research.

Critical systems can't be cut

Technology companies certainly aren't immune to cutbacks. Devices such as Apple's iPod music player and Amazon.com's (AMZN, news, msgs)Kindle electronic reader are luxuries for most consumers. They can easily put off buying such items until the economy is healthier. Though Apple's earnings, reported Oct. 21, show healthy demand, company executives issued a cautious outlook for the holiday season. Similarly, businesses may avoid upgrading computers and systems in a downturn, leading to lower revenues for computer and server makers such as Hewlett-Packard, IBM and Dell (DELL, news, msgs).

But tech companies may not face cutbacks as deep as those other industries are likely to suffer. After all, businesses often find they can cut costs by parting with employees and relying on technology to fill the gap.

Plus, many businesses have come to view their information-technology operations as core strategic assets that help them maintain their competitive positions. That's one reason Gartner Research doesn't expect a repeat of the dramatic demand declines that hit the tech industry in 2001. Leading-edge technology is no longer a frill -- it's a must.

"In a worst-case scenario, our research indicates an IT spending increase of 2.3% in 2009," said Peter Sondergaard, Gartner's global head of research, in an Oct. 13 note. Gartner was revising its projections down from earlier estimates of a 5.8% increase, but growth is still growth. Though the estimated cut is significant, it pales in comparison to the double-digit declines retail stores are seeing.

Tech is cheap

Perhaps the best reason to look for deals in the tech sector is simply that tech stocks have been beaten so far down by the general pessimism. One good way to evaluate prices of these companies is the PEG, or the ratio of price to earnings to growth, a measure commonly listed among key statistics about a company.

Typically a PEG ratio of 1 indicates that a growth company is fairly valued. In other words, the price of the stock fairly reflects its growth prospects. Many tech companies, including Cisco, HP and Apple, now have PEGs of less than 1, indicating that they may be bargains.

Nevertheless, proceed with caution

With all of that working in tech's favor, that still doesn't mean investors should run headlong into the sector. Although the credit crisis isn't likely to hurt tech companies as much as some others, the crunch will still affect customers' ability to get loans to buy their products, restraining the tech companies' revenue growth.

Undoubtedly, as revenue numbers come in at significantly lower growth rates, these stocks will feel the pressure. The stronger dollar will also squeeze many tech companies, since it means that tech goods developed in the U.S. will cost prospective foreign buyers more. So if you want to get involved in technology, be prepared for some bad news, and be ready to ride it out.

"Whatever you are buying now, be aware that even if it goes up 20% it might come all the way back," American Technology Research's Boyd says.

Still, for investors willing to face the ups and downs of the next couple months, there are long-term deals to be had in the sector.

"This market is not for the faint of heart," says Kessler, of Standard & Poor's. "But there are definitely values."

Published Oct. 23, 2008