Smoke Screen? Searching For Tech 'Growth/Value' Plays

It's tempting to fish for bargains in the tech sector's bloody big-cap pool, but it's far from easy.

OK, the tech-laden Nasdaq Composite is down more than 45% from its March 10 high and many big PC and computer chip shops are looking like they're on sale.

For this week's Big Screen we made a quick and dirty pass through big-cap tech-land. We trolled for tech companies that might have that magic combination of earnings growth and a battered stock. We sifted U.S. big-cap tech stocks for those with estimated annual earnings growth over the next five years that tops 20%, a stock price at least 40% off its 52-week high and a forward price-to-earnings ratio of less than 35 -- roughly half that of the average tech stock, according to Morningstar.

Our humble screen turned up eight stocks, mainly of semiconductor or chip shops -- which had a nice bounce on Friday. Here they are, ranked by their P/E ratio over the next four quarters' projected earnings, according to Bulldog.com Research. Let's poke through them and consider how you might go about separating the wheat from the chaff.

Tech Bargains or Tech Traps? If you're bottom-fishing in the big-cap tech pool, you'll probably turn up some of these names. Then what?
Stock	P/E Forward Four Quarters	Estimated Five-Year Earnings Growth	YTD Return
Micron Technology(MU)	9.4	20.8%	-21.6%
Applied Materials(AMAT)	12.9	25.2	-36.9
Dell Computer(DELL)	16.3	25.6	-65.8
Motorola(MOT)	16.7	21.1	-63.7
Intel(INTC)	19.3	20.6	-21.4
Altera(ALTR)	23.3	26.1	9.5
Solectron(SLR)	23.7	31.1	-40.5
Xilinx(XLNX)	27.9	28.1	-5.7
Texas Instruments(TXN)	29.1	23.2	-11.1
Source: Morningstar and Bulldog Research.com. Through Dec. 7.

The problem is that while these filters are probably turning up some undervalued or oversold stocks, slowing economic growth and PC sales could make most of these cheap stocks even cheaper next year.

"People need to be really careful when they're doing screens like this," says Pat Dorsey, director of stock analysis at Morningstar. "These forward valuations are based on analysts' estimates and those could come down, leaving you hosed if you own the stock."

To say these stocks have come down in the world is an understatement. They're more than 60% off their 52-week highs on average, according to Morningstar. But cheap and value are hardly synonymous. After all, if a company's earnings dip, its P/E stops looking cheap -- essentially turning low-hanging fruit into rotten apples.

But if you want to press on and find something in this screen or a screen of your own, what should you do? In winnowing the list, a good place to start is by ignoring also-rans.

"Tech is a tough sector to bottom-fish in because so many of the rewards only go to the leaders in their industry," Dorsey says. "Your stock does better, recruiting gets easier, and it all snowballs."

That might lead you to focus on a shop like chip titan Intel(INTC) or tech outsourcer Solectron(SLR), for instance, but rule out the likes of Motorola(MOT), which makes some of the innards for pagers, cell phones, walkie-talkies and PCs, among others. While many of these businesses are intriguing, Motorola isn't really a leader in any of them. The firm is also having trouble cutting costs to stay competitive with tough competitors like Nokia(NOK).

"They've got their work cut out for them," says Morningstar stock analyst Todd Bernier, who covers the company. "They're not a dominant player in any space and they're fighting some pretty capable rivals."

An intriguing choice might be Dell(DELL), which might be a bit misunderstood. Dell is being tarred with the same brush as other PC shops, even though the firm is not as reliant on that sagging market.

"I'd pound the table for Dell. Two-thirds of their profits come from servers and laptops, not PCs," says Dorsey.

Another PC shop that's not necessarily a leader -- or on our list -- that stands out to him as a potential bargain is Apple Computer(AAPL). The firm's reliance on the consumer market -- like Gateway's(GTW) -- led to an earnings shortfall. But with a cash position equal to some $10 a share, Dorsey -- a fan of Apple evangelist and Chief Executive Steve Jobs -- thinks it's hard to ignore at less than $5 above its cash.

Still, no matter what cheap tech shops you choose, it's a leap of faith, given the varying degrees of gloom many see ahead. After all, many value fund managers who scooped up these bargains have been burned so far and stock fund managers in general are letting cash mount up in such an uncertain market.

If you're more interested in giving your money to a fund manager than poring over data, check out Monday's Fund Junkie column, which will single out some pros and look at what they're holding these days.

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