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A Tale of Two Tech Sectors

April 29, 2014 | About:

Are technology stocks in a bubble? Yes.

Are some of the best values in the world in the tech sector? Oddly enough, the answer to this question is also yes. We have what I call a tale of two tech sectors.

“Boring” old-line tech names like Microsoft (MSFT), Intel (INTC) and even Apple (AAPL) are shockingly cheap right now. (Yes, I realize that it might be a stretch to call Apple a “boring, old-line tech company,” but its last major innovation—the iPad—was released four years ago, and the product that drove its large earnings beat this week—the iPhone—came out in 2007.) All three of these tech names sport dividend yields higher than the S&P 500, and all are priced at price/earnings that barely in double digits once you strip out the cash.

Meanwhile, social media stocks boast valuations reminiscent of the late 1990s. Facebook (FB) and Twitter(TWTR) trade for 19 times sales and 33 times sales, respectively. And yes, that’s sales, not earnings. Interestingly, Facebook shares were down slightly today after the company soundly beat its earnings estimates in its after-hours release the day before.

Last week, I recommended shorting a basket of social media and other tech momentum stocks on any strength. I would reiterate that call today, but I would recommend pairing it with a basket of old-line tech shares. Apple is one of the cheapest companies in the world by any traditional metric, and—as it proved this past quarter—its aging portfolio of products remains wildly popular. And Microsoft, under Nadella, is proving to be a much nimbler operator than it was under Balmer.

ACTION TO TAKE
Short a basket of “new tech,” including social media darlings Facebook and Twitter, and go long a basket of legacy tech names. I recommend Apple, Microsoft, Cisco (CSCO) and Intel, as a start, though simply buying the Technology Select SPDR (XLK) would be a viable option as well. Plan to hold for 6-12 months.

Disclosures: Long MSFT and INTC

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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