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Tuesday, March 24, 2009

Are tech stocks expensive?

This weekend we ran the Alert HQ process and generated the list of Trend Leaders. These stocks and ETFs are distinguished by strong recent performance. Using daily data, we look for stocks that are over their 50-day moving average. We then use three different technical indicators to determine trend: Aroon, DMI and MACD. All three indicators must be registering strong readings in order for a stock or ETF to make the list of Trend Leaders.

Below we present those stocks from the Tech sector that made this week's list. Data is as of the close on Friday, 3/20/09.

SymbolName Last Price Market Cap PE Ratio Price to Sales Price to Book PEG Ratio
BMC BMC SOFTWARE, INC. 30.78 $5,683,000,000 24.19 3.14 6.02 1.18
IRM IRON MOUNTAIN INC. 21.16 $4,274,000,000 53.69 1.43 2.43 1.41
KEI KEITHLEY INSTRUMENTS 3.19 $49,800,000 N/A 0.32 0.66 N/A
NZ NETEZZA CORPORATION 6.55 $390,900,000 13.43 2.14 2.28 1.53
PER PEROT SYSTEMS CORPORATION 12.68 $1,515,000,000 13.34 0.55 1.17 0.89
RAX RACKSPACE HOSTING, INC. 6.25 $734,800,000 36.49 1.52 2.98 2.02
29.61 $2,399,000,000 18.23 2.14 2.87 0.91
AMZN, Inc. 69.96 $29,984,000,000 46.95 1.57 11.23 2.11
BBOX Black Box Corporation 22.98 $402,900,000 8.64 0.39 0.61 N/A
CAVM Cavium Networks, Inc. 11.77 $485,100,000 336.86 5.61 3.78 13.97
CERN Cerner Corporation 42.97 $3,452,000,000 19.66 2.13 2.72 0.96
CIEN CIENA Corporation 6.75 $612,000,000 N/A 0.78 0.67 N/A
CREE Cree, Inc. 22.98 $2,034,000,000 70.46 3.92 1.82 2.06
DIOD Diodes Incorporated 10.16 $420,600,000 11.5 1.01 1.17 N/A
EPIC Epicor Software Corporation 3.52 $210,400,000 215.29 0.45 0.79 0.54
MCHP Microchip Technology Incorporated 20.18 $3,675,000,000 12.87 3.83 3.72 2.17
NOVL Novell, Inc. 4.12 $1,419,000,000 N/A 1.59 1.36 1.24
QLGC QLogic Corporation 11.22 $1,360,000,000 13.22 2.06 2.17 0.9
QSFT Quest Software, Inc. 12.14 $1,149,000,000 19.52 1.61 1.35 0.96
RADS Radiant Systems, Inc. 3.63 $117,800,000 11.97 0.42 0.91 0.46
SWKS Skyworks Solutions, Inc. 7.69 $1,273,000,000 11.84 1.57 1.39 1.07
SMSI Smith Micro Software, Inc. 4.99 $156,700,000 N/A 1.67 0.99 0.34
TATTF TAT Technologies Ltd. 5.44 $35,600,000 8.22 0.34 0.46 N/A
PANL Universal Display Corporation 7.51 $272,700,000 N/A 25.05 3.6 N/A
UEIC Universal Electronics Inc. 16.58 $225,600,000 15.72 0.81 1.53 1.3

All of these stocks have been rolling up some very nice gains for a number of weeks now. In looking at this list, however, I get the impression we are seeing some froth. What does that say about the current rally?

We already know that the technical signs indicate strong up-trends for these stocks. It's the fundamentals that are worrisome. The PE ratios range from fair to excessive and some of the stocks do not have positive earnings at all. Price-to-Sales, Price-to-Book and PEG ratios also range from fair to excessive.

Looking at a few of the stocks on this list, we can see there are certainly some good companies. BMC, for example, is benefiting from the recently announced partnership with Cisco Systems as Cisco begins to make its move into data center servers and data center management. Still, with a PE in the 20's, Price-to-Sales over 3 and Price-to-Book over 6, the stock is not cheap.

The situation with Iron Mountain is similar. The firm benefits because, by law, many companies are required to retain data for seven years or more. Under this scenario, Iron Mountain earnings could be expected to hold up reasonably well during a downturn. But a PE over 50? This stock is no bargain.

As we go down the list, we see Perot Systems looking reasonably attractive on a valuation basis but it is immediately followed by Rackspace Hosting at a PE over 36. In general, this pattern repeats with stocks showing decent value alternating with rather speculative and seemingly quite expensive stocks.

Many analysts have been saying stocks are cheap. Based on this evaluation, they are saying it is safe to buy again. Reviewing this list of favored stocks doesn't confirm the "stocks are cheap" thesis. Given that we are still much closer to the 52-week lows than we are to 52-week highs, I would think that more of these stocks would be exhibiting financial ratios that would indicate more attractive valuations.

If these stocks comprise the tech leadership, this rally may need to pause and wait for earnings to catch up with stock prices.

Disclosure: none

1 comment: said...

Hi, I'm from Russia. Surprised large Market cap. Very interesting.

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