Five "Value" Techs

10/29/2004 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

"The rumors of the death of tech stocks have been exaggerated," says John Dessauer . "And some tech stocks are priced so low that they have become value stocks. Here, he looks at a package of five technology stocks that he feels could double over the next two to three years.

"Looking at most tech-stock prices lately, you would think that no one is buying computers, consumer electronics, or anything that uses semiconductors. Wall Street mutual fund managers have run away from tech stocks. But tech-company managers see a better-than-expected fourth quarter. If, as I expect, sales pick up in this quarter, tech stocks will rise again – and we won’t have to wait until January to see the profits. I expect to see raised earnings guidance before Christmas. Meanwhile, I have little doubt that this portfolio of undervalued tech stocks will double within two to three years, and perhaps deliver 30% gains within the next 12 months. I am a value investor by training and instinct, and I find great value in these five technology-based stocks right now.

"Philips Electronics (PHG NYSE) makes semiconductors and consumer electronic products, in addition to its basic light-bulb business. The company has already made a tremendous recovery. After losing money in 2001, Philips managed to regain profitability in 2002 and is now on track to earn $2.40 a share for 2004. The stock has been weak due to slower-than-expected chip sales growth and because Wall Street currently sees flat earnings ahead for 2005. But Philips is doing very well under the circumstances and the extraordinary recovery in earnings since 2001 tells me that Philips management is doing most things right. Philips trades like a value stock – at just one times sales and 10 times earnings, with a dividend yield of 1.8%. This is the lowest valuation on the stock since 1995. Philips is a good way to invest in tech without taking excessive risks.

"Nokia (NOK NYSE), the Finnish cell phone maker, has a huge hoard of cash of over $10 billion. Sales of new phones are already doing better than expected. Earnings for the quarter are estimated at about 15 cents per share, far better than Wall Street’s estimate of 11 cents. Nokia is gaining market share again due to aggressive pricing and new model introduction. In addition, the stock pays a handsome 2.8% dividend, while we wait for sales and market share to return to their former glory. Nokia could earn 70 cents a share this year. Wall Street likes the news but is not ready to boost 2005 estimates. I think Nokia can earn $1.00 a share in 2005. With that, a very strong balance sheet, and excellent management, Nokia is a Buy.

"LSI Logic (LSI NYSE) specializes in designer chips for consumer electronic applications. LSI has recently joined the ranks of other tech companies that said their third quarter will not be as strong as expected. However, the firm expects that fourth-quarter sales will be greater than the third, since the company has many Christmas-oriented consumer electronic makers on its customer list. The fourth quarter is shaping up to be stronger than many now expect. When final demand picks up later this year, LSI’s revenues will rise when other companies re-order chips. Buy LSI while it is under $5. The stock is likely to be significantly higher by early 2005.

"There is a raging battle between computer operating systems, pitting Microsoft Windows against Linux, an open architecture system. Novell (NOVL NASDAQ) is a major player in the Linux field. It has taken a while, but Linux is gaining traction. Unlike most cash-strapped tech companies, Novell generates lots of cash and has more than $1.1 billion in the bank. Linux isn’t going to sweep away Windows, but Linux has matured to the point that it is very attractive for many large applications. Linux is here to stay, and Novell is a competent, well-financed player. The stock is down from $14 in February, making it a bargain now. In addition, the firm recently bought back 15.2 million of its own shares. Let’s emulate Novell management and buy these shares on the cheap.

"The world is undergoing a television revolution, and TV set-top maker Scientific Atlanta (SFA NYSE) is leading the way. I think consumers will start to get hooked on the new wave of home entertainment products and services. Video-on-demand, for example, isn’t just for movies. It allows you to watch any program you want, when you want, and commercial-free. High-definition television (HDTV) is a quantum leap in picture quality. The company is a world leader in providing the equipment that makes all of these new home entertainment services possible. Scientific Atlanta may well keep growing much longer than most analysts now expect. I think Wall Street is missing a great opportunity here."

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