Companies are cutting dividends with the consistency of lawnmowers cutting grass, so it was notable when a major corporation, IBM (IBM), recently announced a 10% boost to its dividend. This came shortly after the excitement of IBM pursuing Sun Microsystems (JAVA), only to step back and have Oracle (ORCL) swoop in and buy the storied Sun.
True, many technology companies are suffering during the current economic downturn, but IBM's performance, as reflected in its dividend increase, and Oracle and IBM's interest in Sun, suggests that not all tech companies are operating in an overloaded state and need to reboot. Some, in fact, are holding their own or better, and many retain substantial value.
Using the Guru Strategies I rely on to choose stocks, I screened technology companies -- hardware, software, and service -- and found three worth your consideration. Interestingly, neither IBM nor Oracle was among them. This does not mean these companies are doing poorly, but that their stocks are fairly priced and do not offer high value at this time.
One company worth a look is VanceInfo Technologies (VIT), once known as WorkSoft. Based in Beijing, China, VanceInfo is an IT service provider and an offshore software development company. The company's primary market has been the US. But with the economic downturn there, the company has been focusing on providing IT services and software development more and more on its home turf. Morningstar reports that in 2008 China accounted for 21.5% of the company's total business, nearly double 2007's 11.7%. At the same time, the US share of VanceInfo's total business went from 68.8% in 2007 to 54.7% in 2008. One thing you need to be aware of: VanceInfo's market cap is just under $300 million. This is fairly modest, so even a small increase in demand for the stock can send the price spiking up. Do not go chasing it if there's a run-up; wait until things calm down before you buy.
The Guru Strategy I base on Martin Zweig's writings likes VanceInfo. The stock's P/E ratio of 18.45 fits nicely within the range allowed by the strategy, which is 5 to 39. The latter figure is based on the strategy's desire for a P/E not more than three times the market's current P/E, which is 13. Earnings growth is a robust 34.29%. Zweig looks for companies whose revenue growth can at least keep up with earnings growth. VanceInfo's revenue grew last year at a blistering 64.41%. Some other variables related to VanceInfo that the Zweig strategy likes: earnings are increasing when compared to the same quarter a year ago, long term earnings growth of 34.29% is more than double the 15% minimum required and the company has no debt. All of these add up to a strong case in VanceInfo's favor.
Walldorf, Germany-based SAP Corp. (SAP) produces enterprise planning resource software. "The New York Times" reports that in 2007, SAP accounted for 10% of the market for business software, versus arch rival Oracle's 6.6%, while Forbes, in its 2009 ranking of the largest corporations, identified SAP as the sixth largest among software-and-services companies.
My Warren Buffett-based Guru Strategy likes SAP. That's because the company is dominant in its market, has had earnings increases in each of the last seven years and in eight of the last 10 years, and has little debt. It earns a healthy 23.1% on equity and 16.7% on retained earnings. Further, the strategy calculates that for those who buy the stock at its current price, they will earn about 14% annually for the next 10 years. That's a solid return. Period.
The last stock I want to tell you about is the benchmark company against which all other high tech companies are measured, namely, Microsoft (MSFT). The world's most dominant software company, Microsoft is favored by the strategy I base on Peter Lynch's writings.
By the Lynch strategy's reckoning, Microsoft is a fast grower because its growth rate of 21.05% exceeds 20%, the minimum needed to be called a "fast grower." The company's P/E is 11.74 (which, by the way, is below the market's 13). Combining the company's growth rate with its P/E, we get a P/E/G ratio of 0.53. A P/E/G of 1.0 or less is acceptable and below 0.5 is great, placing Microsoft among the near-great. Another plus for the company is its very low level of debt. Microsoft is a standard-bearer among all high tech companies, and at its current price, it should become a standard bearer for your investment portfolio.
These are three high tech companies from around the world. They are reasonably priced, perform well and have the support of the Guru Strategies. Each is well positioned to take advantage of the turnaround in the economy when it comes.
Published by Globes [online], Israel business news - www.globes.co.il - on May 7, 2009
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