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3 Great Values in Large-Cap Tech

These three stocks are down, but not out -- and should come back

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A party has been going on in large-cap tech during the past three years, but someone forget to invite Cisco. While this period has brought spectacular gains for the likes of Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), and Apple, Cisco is barely above its post-crisis trough of March 2009.

Just Friday morning, Stern Agee cut its estimate for the stock due to customers’ tendency to delay projects amid the weakening outlook for economic growth.

All of this raises the question: Will Cisco ever be a buy again?

With its valuation at these levels, it’s certainly worth a look. CSCO’s trailing P/E of 12 is at its lowest level in a decade. Its forward P/E is just 8.5, and it drops to 5.4 when the approximately $6 of net cash on the balance sheet is taken into account.

CSCO 10-Year P/E history

The stock also offers a 2% yield, and — like IBM — a low payout ratio (19%) and a boatload of cash on the balance sheet indicate show there’s room for growth on this front.

In the short term, however, Cisco is feeling the heat from slower government spending and the general unease about the impact of weaker growth on the tech giants. Still, bandwidth demand — like mobile phone penetration — is one of the most reliable trends in the world economy right now. Cisco is projecting a 29% compounded annual growth rate for global internet traffic in the 2011-2016 period, including 78% for mobile data traffic. The full report, with all of its gaudy numbers, can be viewed here.

The combination of growth opportunities and an all-time low valuation indicates that this one-time momentum stock may have some juice in it yet. The story will take some time to play out, and the stock could stay weak prior to the Aug. 15 earnings report, given Cisco’s tendency to offer cautious guidance.

But at these levels, Cisco — which is priced more like a Hewlett-Packard (NYSE:HPQ) rather than as the established leader in a fast-growing industry — is offering one of the  best risk/reward profiles in the tech space.

The Bottom Line

It’s a tough time to go prospecting in technology. The combination of the summer doldrums, slowing economic growth and elevated uncertainty are undoubtedly taking a toll on the sector’s performance. But for longer-term investors, these challenges may be just the ticket to getting in on these three undervalued industry leaders at outstanding prices.

Article printed from InvestorPlace Media,

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