Tech Stocks Look Relatively Handsome

In a pseudo follow-up to my last post, there are compelling arguments that technology companies present a good relative value.  Bloomberg published some items highlighting this:

1. Computer stocks trade at 9.3 times EBITDA, which relative to other stocks is the lowest ratio since 1998.
2. Based on analyst projections, technology stocks trade for 12.8 times forward earnings.  This is lower than the S&P 500, which trades at 13.1 times forward earnings.
3. Technology stocks trade at 9.3 times EBITDA, which is lower than the 14.5 times EBITA average since 1992.
4. The S&P 500 Information Technology Index trades at 2.4 times sales, which is lower than the average of 2.6 since 1992.

In this sense, relative value is the value of technology stocks relative to the overall market or past valuations of technology stocks.   Thus, if these stocks are truly undervalued it would logically follow they should have higher long-term returns relative to the broader market.

Further, when looking at the current situation these types of stocks seem poised to have better relative returns to the broader stock market anyway.  Aside from being relatively undervalued let’s look at two scenarios – the economy does well, the economy does badly.

If the economy does well, what will businesses do?  They will invest.  If they invest, what will they invest in?  Most likely they will upgrade their technology. 

If the economy does badly, which companies hold up the best?  Companies with cash to navigate tightening credit markets and falling revenues.  Also, companies with diverse and global revenue streams will be able to generate sales from outside the US.