3 Undervalued Tech-Sector Gems

04/26/2012 10:15 am EST


George Putnam

Editor, The Turnaround Letter

Following are a trio of stocks that have yet to claw their way back to their perches before the global economic maelstrom hit,  but they're finally showing signs of life, writes George Putnam III of The Turnaround Letter.
In early March, we marked the third anniversary of the stock market’s low point following the 2008-09 financial meltdown. We thought this might be a good time to reflect on what lessons we might all learn from the market’s behavior over the last three years.

The most important lesson is not to try to time the market. In March 2009, most investors, both individual and professional, were very negative on the stock market. The American Association of Individual Investors Asset Allocation Survey showed that in March 2009 the average survey respondent had a smaller percentage allocated to stocks (41%) than in any other month during the 25-year history of the survey.

Of course, we all know what happened after March 9, 2009. Since that date, the S&P 500 index has gained 110%, making the past three years one of the best periods in history to own stocks.

The ability of investors to call market peaks is no better. The highest stock ownership in the history of the AAII survey (77%) occurred in January 2000 and again in March 2000, just as the tech bubble was beginning to burst. The S&P 500 fell by 49% over the next 2 1/2 years.

This lesson is relevant today because many investment gurus are saying that the market has run up too far this year and it is time to sell stocks. There is no reason to believe they are any more right today than they were in March 2009 or March 2000. For whatever it’s worth, stock ownership in the latest AAII survey was 59%, just a hair’s breadth away from the historical average of 60%.

The other lesson that we frequently reiterate is the value of diversification. While most stocks are up nicely since March 2009, not every one is. If you had bought just one or two stocks back in 2009, you might have picked the wrong ones and missed out on the gains.

As contrarians, that got us to thinking about stocks that haven’t participated in the three-year rally. We wrote about some of those in the October 2011 issue, and the following paragraphs discuss three other interesting stocks currently trading near or below their March 2009 levels.

Best Buy (BBY)
The giant electronics retailer has struggled recently, as it has been squeezed between Wal-Mart (WMT) and Amazon (AMZN). Management just announced a restructuring plan that involves closing a number of big box stores and developing more of a presence in smaller, specialized retail outlets.

The moves are expected to produce $800 million in savings by fiscal 2015. Best Buy’s challenges are significant, but the brand remains strong, and solid financials give management the time and resources to right the ship.

Boston Scientific (BSX)
This maker of medical equipment, has suffered a variety of setbacks in recent years, ranging from quality control issues to questions about the efficacy of some of its main products. Moreover, it is still hampered by the debt taken on to finance the acquisition of Guidant in 2006.

But the com-pany has come a long way in arresting its problems, and it is producing improved cash flow and using it for stock repurchases and acquisitions. The recent $1.3 billion purchase of Cameron is expected to boost the firm’s cardiac rhythm management business.

And the announcement of a new CEO, the former chairman of Johnson & Johnson’s (JNJ) Medical Device and Diagnostics Group, is a welcome development. New products, together with opportunities abroad, particularly China and India, should help rekindle growth.

Hewlett-Packard (HPQ)
H-P continues to search for a new growth engine as the personal computer world becomes increasingly commoditized. The company has a strong brand and leading positions in several key market segments, but these advantages have been muted recently by high-profile turnover in the CEO suite.

Meg Whitman, who led eBay (EBAY) for a number of years, has taken over the helm. It is still too early to tell if Whitman will succeed where several others have failed, but she has plenty of good assets to work with.

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