Skip to main content

The Big Screen: Cheap, High-Growth Tech Stocks (This Is Not an Oxymoron)

These stocks offer high growth and low P/Es relative to the S&P, and funds have taken notice.

So, you want to buy tech stocks, but their yo-yoing this year has made you, shall we say, price conscious?

Those damp palms are justified. After ringing up a 102% return last year, the tech-heavy

Nasdaq 100 fell more than 30% from its March 10 peak to its May 25 low.

Since then, it has shot up more than 24%. Along the way, some speculative dot-coms have been cold-cocked:

Ask Jeeves


, for example, has fallen from a 52-week high of 190 to 15 3/8 at Friday's close. And even bellwether


(MSFT) - Get Microsoft Corporation Report

is trading more than 35% off its peak.

It's shaky times like these that veterans say make for tough decisions -- but sometimes great opportunities in which solid companies sell at cheap prices. Here's a list of large-cap tech companies with projected five-year earnings higher than the market and price-to-earnings ratios below the market, using the

S&P 500 as a benchmark. To make our list, the companies also had to be more than 10%-owned by fund managers.

We limited our focus to cheap, steady-growing large-caps that have won fund managers' hearts in an attempt to keep risk down.

"It's a sensible group of criteria for the conservative tech investor who doesn't want to be sitting there watching


all day or worrying about concept stocks," says Pat Dorsey,

Scroll to Continue

TheStreet Recommends


director of stock analysis.

Of course, the question is, which of these cheap stocks is a value? Like a lot of stock or fund screens, this leaves us with a mixed bag and plenty more homework to look behind the numbers.

Software maker


(ORCL) - Get Oracle Corporation Report

, for instance, doesn't really belong on our list. A one-time 831% jump in income last quarter, primarily the result of lucrative investment profits, knocked its P/E ratio down below the S&P 500's. At the end of 1999, the stock's P/E ratio was higher than 120, nearly four times the market's average, and it will head to a more lofty P/E once its next earnings report comes out in September.

While funds own some 15% of the company, and the biggest tech fund in the nation, $12.6 billion

(PRSCX) - Get T. Rowe Price Science & Tech Fd Report

T. Rowe Price Science & Technology, bought more than 4 million shares in the first quarter, it's probably not a great choice for bargain hunters.

What might be a more realistic option on our list?

Dorsey likes mainframe software shop

Computer Associates

(CA) - Get CA, Inc. Report

, while conceding that its shares "blew up" when the firm announced late July 3, when most money managers and analysts were halfway to the beach, that it would miss revenue estimates. Since then the shares have dropped from more than $51 to just above $28, a 44.7% tumble.'s

Herb Greenberg

wasn't thrilled, but Dorsey says the shortfall is a short-term problem for a long-term winner. The company said customers put the brakes on deals just as their quarterly books closed. Dorsey says these customers delayed their purchases until they could digest a change in


product line, but that the orders and the company's revenue will come back.

"There's negativity in the near term, but this is a well-managed company and they'll put it back on track. Right now, you're getting a great company with a great position in its industry at a dirt-cheap price," he says.

Network shop



also might be worth a look, and not just for its



stake, says Jeff Van Harte, manager of


Transamerica Premier Equity, which has 3.5% of its assets in 3Com and 0.5% of its assets in Palm. The fund boasts a 27.8% three-year annualized return, which beats more than 60% of its large-cap growth peers, according to Morningstar.

3Com, which


Janus Twenty,

(JAWWX) - Get Janus Henderson Glob Research T Report

Janus Worldwide and


Janus Olympus bought in the first quarter, is spinning Palm off to its shareholders.

Palm is the maker of the suddenly ubiquitous hand-held devices that can plan your life while also giving you the score of the Red Sox game. The conventional wisdom is that beyond Palm, 3Com is a company trying to exit low-growth businesses and focus on more profitable units.

"I think Palm is gigantic; it's a new technology platform that's just going to be huge," says Van Harte, whose fund, along with other 3Com investors, will get 1.4 Palm shares for every 3Com share the fund owns. But he likes 3Com, too. "I think it's in an intriguing, special situation right now," he says, without specifying whether he's buying or selling the stock.

He says if 3Com can keep its position in the network-interface card market and successfully compete in the wireless-network and home-networking areas, it could be a solid long-term pick.

Dorsey believes

Apple Computer

(AAPL) - Get Apple Inc. Report

is an intriguing play as well, basically by virtue of Chief Executive

Steve Jobs

, Apple evangelist and creator of the sleek, Barbarella-esque iMac and iBook computers.

"Steve Jobs is maybe the best consumer-product designer on the planet, and he's running the company. That's a good thing," Dorsey says.

After the stock lost more than 30% in both 1996 and 1997, Jobs returned to the company he helped found. Though still weak in the corporate market, the iMac line has been a smash with consumers, leading to rising sales and profits, as well as better margins. In its most recent quarter, for instance, 28% of iMac purchasers were first-time PC users and 17% had switched from a Windows-based PC.

The stock rose 212% in 1998 and 151% in 1999, and several Fidelity funds, including the $110.9 billion

(FMAGX) - Get Fidelity Magellan Report

Magellan, bought shares in the first quarter, according to Morningstar. Of course, now it's not necessarily a bargain unless you believe Apple, whose share of the PC market is in the single digits, can keep increasing sales in a mature business.

While Apple and the other companies we've singled out aren't home-run swings, they have attractive criteria: profits, somewhat sane prices and solid businesses. Unlike much of the tech sector right now, their valuation risk (the risk that they're too richly valued) doesn't rival their business risk (the risk that their strategy won't work). And in this market, that might be saying something.

"We have seen the market pay more attention to valuations this year. Less insanely valued companies like these have come back much more than the more speculative stocks," says Dorsey.