It's beginning to feel a little like 1999 in the technology sector. Built on the back of Facebook's pending offering, social media fever has hit the market. Investors have clamored to be a part of the new social tech scene and a variety of internet-based firms have launched high profile IPOs. The buzz around apps, smartphones, cloud computing and tablets has once again lit the tech rocket. However, with visions of The Globe.com still dancing in analysts heads, many are questioning whether we are about to enter a new social media filled tech bubble. While there are plenty of concerns with regards to these new IPOs. like Zilliow (NYSE:Z), the other side of tech continues to get cheaper.
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A Two-Sided Tale
With social frenzy gripping the technology sector, many of the hottest stocks are now trading at nosebleed levels. For example, recent initial public offering from social job board LinkedIn (Nasdaq:LNKD) traded for a P/E of 844. Those kinds of valuations are enough to make your head spin. While tech has always been about growth, and future growth doesn't necessarily come cheap, placing such high metrics on firms with no moats or less than stellar earnings is exactly what got investors in trouble back in late 1990s.
However, while Yelp (Nasdaq:YELP) may trade at a lofty appraisal, old tech is downright cheap. Large cap tech has been passed over by investors as the focus has shifted to the high flyers. Shares of tech titans are now trading for less than the broad market; as of December 2011, large-cap tech can be had for a forward P/E of 11. That compares with a forward P/E of about 12 for the broad S&P 500. This is a significant changing of the guard. Historically, tech has traded a premium to the broad market, but now are 14% below their five-year averages. Semiconductors, alone, are almost 38% below their five-year averages.
Cheapness aside, today's tech behemoths do something they didn't do before: pay big dividends. Flushed with cash, a variety of mainstream technology firms have begun returning that cash back to shareholders by way of dividend payouts. The sectors dividend-payout ratio presently sits at 14.5%. This compares with 28.8% for the S&P 500, leaving plenty of room for growing payouts down the road.
Despite the "dotcom 2.0 bubble" talk, mainstream technology firms represent one of the few values in the market place, and shouldn't be affected if Angie's List (Nasdaq:ANGI) sinks in value. For investors, betting on some of the old tech titans could do a portfolio a world of good. The Technology Select Sector SPDR (NYSE:XLK) is still one of the best ways to add a wide swath of these venerable tech firms. However, some of the best ways to play could be individual firms. Here are a few picks:
After spinning out the sexier handset and phone business, boring Motorola Solutions (NYSE:MSI) deserves a portfolio position. The firm makes an array of communications equipment, and currently pays a tech hefty dividend of 1.7%. However, analysts estimate that the firm will distribute more than $7 billion back to shareholders through dividends and buybacks by 2015; this represents about half of the market cap. Motorola Solutions currently can be had for a P/E of 14.79.
Intel (Nasdaq:INTC) continues to get stronger, yet trades for way cheaper metrics than it did during the bubble. Back in 1999, shares went for a P/E of 33. Today, that number is around 12. The company remains the dominate player in semiconductors and earns enormous revenues. It shares those large earnings with shareholders via its high 3% dividend. Likewise, semiconductor firm Analog Devices (NYSE:ADI) continues to produce strong cash flows and pays a similar high dividend.
The Bottom Line
While the recent social media IPOs have caused some investors to wince at the possibility of a new tech bubble, mainline large-cap tech is cheap. For investors, that could spell a huge opportunity to score some value on the cheap. The previous picks, along with storage giant EMC (NYSE:EMC), make ideal selections.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.