Tech stocks cheapest in seven years as profit estimates drop

Technology Spending

Apple, the world’s second-biggest company by market value, posted the first profit drop in a decade and said sales would be lower than analysts estimated this quarter. While the Cupertino, California-based maker of iPads also said it would return $55 billion to shareholders through buybacks and dividends, the stock ended the week at $417.21, 41% below the peak reached in September.

The valuation fell to 10.4 times forecast earnings, the ninth-lowest in the industry.

IBM missed forecasts for the first time since 2005, sending its shares tumbling the most in eight years, as demand for hardware weakened and the company failed to sign customers to contracts. The world’s biggest computer-services provider plans to spend $1 billion cutting jobs in the second quarter, when profits are projected to climb at the slowest pace since 2004, data compiled by Bloomberg show.

IBM Shares

Shares of Armonk, New York-based IBM trade at 11.4 times projected earnings, cheaper than 78% of S&P 500 companies.

EMC Corp., the world’s biggest maker of storage computers, said last week that it plans to buy back $1 billion in shares in 2013. The Hopkinton, Massachusetts-based company had reported first-quarter earnings that missed estimates as customers restrained spending. The shares are down 12% this year, sending the valuation to 11.7 times projected earnings.

Estimates show profits for the 70 companies in the S&P 500 Information Technology Index may shrink in the second quarter, according to a survey of analysts tracked by Bloomberg. The projection for a 5.5% profit contraction is down from an estimate for 7.2% growth at the start of the year, according to Bloomberg data.

For James Paulsen, who oversees $325 billion as the Minneapolis-based chief investment strategist at Wells Capital Management, the industry is a bargain. He predicts technology stocks will rally as companies use excess cash to repurchase shares. Paulsen’s firm added to stakes in Salesforce.com Inc. and Cisco Systems Inc., according to a Dec. 31 filing.

Extra Spending

“I’m as nervous about the large-cap tech growth stories as anybody, but I also think that they are getting to be really reasonable values,” Paulsen said in an April 24 phone interview. “There’s a lot of extra spending to come. I think we may start to see some of that starting to emerge before the year’s out.”

For contrarian investors, now may be a good time to buy. Computer shares have fallen 6.6% since reaching a peak in September, while makers of household goods and health-care stocks soared at least 14%. Technology, energy and financial stocks are the most inexpensive industries in the S&P 500 with multiples of less than 14 times earnings.

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