It's hard to believe it was ten years ago this month that the great tech bubble burst, jump-starting a bear market the likes of which nobody ever expected. Even more incredible is how the perception of - and tolerance of - the technology sector's stocks can change so dramatically in a decade. There's an investment opportunity buried in that reality though. Let's find out what it is. (Find out about the great tech bubble and other landmarks in This Week in Financial History: Speculative Bubbles, Bill Gates, Coca Cola and Capitalism.)
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Leading up to 2000, the P/E ratios for many tech names were triple-digit-sized - and that's assuming the company was profitable (profits weren't even close to being a pre-requisite for ownership). The mindset was simply buy anything that ends in dot-com and ride the momentum created by the new economy. The concept of value was a joke. My how the tables have turned.

Cheap, or Undervalued?
Care to guess which sector actually saw the second-most upside earnings surprises last quarter, with 88.7% of its large cap stocks reporting upside surprises? For that matter, care to guess which sector boasts one of the lowest projected (five year) PEG ratios right now, with a score of 1.1 versus the market average of 1.4? Care to guess - with the exception of the financials' skewed numbers - which sector saw the greatest revenue growth on a year-over-year basis last quarter, with an 8.8% improvement?

In all three cases, the answer is technology - an answer that surprises most, and excites too few. If you're worried that there's some accounting trick in play here, or that the results of a few are skewing the bigger picture, don't worry. The numbers are legitimate representations of what's going on in the sector.

Leading the Charge
For instance, Microsoft's (NASDAQ:MSFT) top line as well as bottom line last quarter - not the operating one, but the real, net income line - were both higher last quarter than they were in the same quarter a year earlier. The same goes for Google (NASDAQ:GOOG), IBM (NYSE:IBM), and Hewlett-Packard (NYSE:HPQ).

Were it just one or two of these companies doing better, it might be dismissable as chance. When almost all of the sectors big guns are putting up bigger top and bottom lines though, it's kind of hard to argue that consumers and business aren't spending again.

The Stealth Recovery
An analyst consensus compiled by Bloomberg suggests computer companies in particular - like Dell Inc. (NASDAQ:DELL) - are undervalued by as much as 17%. The same analysts feel Dell shares could gain 28% over the next twelve months thanks to the (so far) stealth revival of tech spending.

The target may seem lofty at first glance. Of just the five stocks mentioned above though, an average forward-looking P/E ratio of 12.7 and an average projected (five-year) PEG ratio of 1.48 isn't a mere matter of cheap - it's a matter of undervalued. The numbers pretty much speak for the whole sector. Those are valuations that simply just wouldn't have existed in late 1999, before the crash.

Psychology at Work
As for how something like this can happen, I'll just answer the question with another question: when have investors actually been rationale?

What's going on here is simply the swing in the pendulum all the way over to the other side. Investors were burned by tech in the early 2000's, and are now being excessively cautious on the sector. This is the old fear/greed duality of the market.

The Bottom Line
It goes without saying that the next cycle will likely lead to excessive - perhaps dangerous - confidence in the technology sector again. Investors are quick to forget. But this pause represents a cyclical opportunity for investors who recognize it and start taking overweighted long-term positions in tech names. If you're still not interested in shopping for individual stocks, this is one of those instances where an ETF like the iShares Technology ETF (NYSE:IYF) or the Technology SPDR ETF (NYSE:XLK) would actually work pretty well. (For related reading, take a look at Technology Sector Funds)

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