You Won’t Believe What Sector is Still Cheap

By Larsen Kusick, analyst, Phase 1 Investor

I’m going to make some people spit up their coffee in disbelief with this next statement…

Despite a huge 17% rally this year… and despite growing optimism… the tech sector is still cheap.

Last week, the financial papers were full of headlines about the tech stock benchmark Nasdaq Composite hitting the 3,000 level. It’s the first time the Nasdaq has reached this level in 10 years.

As usual, the media tried to attach some significance to the number. A few even tried to suggest it’s a sign of a new bubble.

Nonsense… all of it.

Back in November, I pointed out that tech stocks were one of the few sectors breaking above their key 200-day moving averages. There’s nothing magic about this technical indicator. It’s simply a “road sign” many traders use to say if an asset is in an uptrend or a downtrend.

At the time, I said, “That’s why the latest surge is such an important moment for investors. Investors who were waiting for the ‘green light’ now have it.” I also noted that tech stocks tend to stay in big uptrends for months after crossing this widely-followed indicator.

Four months later, the tech sector fund XLK is up more than 17%. With such a big gain in a short period, some investors might be wondering if it’s time to sell.

The answer is a definite “no.” Here’s why…

Even after the big run, tech stocks are cheap by a number of metrics.

Right now, the tech sector is trading at less than 13 times expected earnings for 2012. That’s just a hair above the price-to-earnings ratio for the S&P 500, which represents every sector in the market.

Even excluding the crazy valuations during the tech bubble, the sector historically trades more than 20% above the S&P 500. Put another way, investors put higher valuations on tech stocks because of their growth potential.

That makes the tech sector a bargain right now, especially compared to other hot areas of the market. It also means there’s room for the tech sector to push higher, even if the rest of the market goes sideways for a few months.

While the tech sector is cheap on valuation, the fundamentals are even better…

Technology is the only sector in the market that has more cash on its balance sheet than debt. That’s not a surprise when you consider the massive amounts of cash that companies like Apple, Microsoft, Cisco, and Oracle are sitting on.

Given all this, there’s no reason to “get off the tech train” right now. Sure, the selloff that Jeff Clark expects could knock these prices lower in the short-term, but the combination of low valuations, strong fundamentals, and an overall uptrend means these stocks should end the year much higher than where they are now. Any short-term selloff is a buying opportunity for your favorite tech stocks.

Good investing,

Larsen

— The Stock Enthusiast

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