Concerns about global growth have weighed heavily on the technology sector in the past three months, and if Apple (NASDAQ:AAPL) is removed from the equation, the results are even worse. With sentiment about this earnings season already so poor, now may be the time to do some prospecting for value in the sector.
The challenge with tech stocks is to separate the actual values from the myriad of value traps. One way to do this is to avoid the temptation to bottom-fish among companies that have fallen behind the technology curve and/or are stuck in the mud of commoditized businesses.
Instead, the real value can be found in companies that dominate their respective industries but are being beaten up by short-term headwinds. IBM (NYSE:IBM), Qualcomm (NASDAQ:QCOM), and Cisco Systems (NASDAQ:CSCO) are three that fit the bill.
In late March, IBM had a trailing one-year return of 30.1%. The shares were looking rich, with a P/E at the top of its five-year range and a P/E-to-growth (PEG) ratio well above their historical average. Since then, the stock is down 12.2%, and the froth has been taken out of its share price. IBM now trades for just 13.7 times trailing earnings and 11.2 times forward, which puts it at a reasonable PEG of 1.06 (where 1 is considered fairly valued).
IBM continues to offer the combination of both growth and defensiveness. Although it’s one of the largest companies in the world — which makes big earnings gains challenging — IBM is at the forefront of both cloud computing and data analytics. The company is forecasting at least $20 of earnings per share for 2015 versus estimates for $15.07 in 2012.
On the defensive side, the company generates the majority of its revenue from long-term contracts — which puts it in an enviable position at a time of slowing global growth.
So what’s the problem? Right now, IBM is being hit by the concerns about the rising dollar’s impact on its revenues from overseas. A look at the chart below shows that the stock has had an almost perfect negative correlation with the greenback so far this year.
While the dollar is unlikely to reverse its recent gains until investors go back into “risk-on” mode, the note from Deutsche Bank analyst Chris Whitmore in January, as reported on allthingsd.com, continues to ring true today: “Although the stronger dollar is likely to impact reported revenue, IBM remains one of the most defensive names in our universe due to its high exposure to recurring profit streams, past backlog growth and wide geographic and business diversification.”
Add it up, and the recent sell-off looks like an excellent opportunity to “buy the dip” with one of the tech sector’s leading companies. IBM reports earnings on Wednesday, July 18.