Jewish World Review June 22, 2001 / 1 Tamuz, 5761
James K. Glassman
Tech Commodity Buys Available for Mining
AS I write this column, the NASDAQ composite is bouncing
around just below 2000. Market gurus warn of a long summer
for technology investors. And many analysts continue to note
that even though the technology sector has fallen by 20
percent so far in 2001, after an even more horrendous year in
2000, tech stocks are still not cheap. How much worse can it
get? Well, if youíre looking for doomsday theories, find
another column. Iím a long-term bull, and Iím not about to
succumb to a bearish fad.
Itís true that many great tech firms still trade at high
price/earnings ratios, by historical standards. I believe that in
many cases the valuations are justified, but what many of the
pundits are missing is that there are also plenty of tech
companies that are dirt cheap by almost any standard.
Letís look below the surface of the technology industry to
examine the unsung firms that provide crucial components for
the digital revolution. Unwilling to buy Cisco (CSCO) when itís
still valued at roughly five times its annual revenues? Well,
how about a tech firm that trades at five times its earnings?
Yes, there are a few of them. Kemet Corp. (KEM) and AVX
Corp. (AVX) make capacitors, used in abundance in electronic
devices from computers to cell phones to microwave ovens.
Are these two companies establishing powerful brand names
with leading edge technology? Not at all. They make
commodity products, which will never be confused with
microprocessors. You wonít see these companies on the
cover of Forbes, and no one will ever refer to their products
as ďthe brains inside the PC.Ē
But both companies have been increasing their profit margins
in recent quarters, both have an impressive record of rising
earnings, and they have good balance sheets Ė not too much
debt. By no means do they control their destiny or exercise
leadership in technology markets. They ride along with the
fortunes of the tech industry, but right now the fare is very
inexpensive for shareholders.
Kemet is trading at a price/earnings ratio of about 4, while
AVX has a P/E ratio just below 6. Either one could be a good
investment for someone who is bullish on technology but
thinks the super techs are still too expensive. No doubt,
Kemetís earnings will fall off this year. Only two analysts
cover the stock, and their estimates are for $1 in earnings
this year and about $2 next year. Over the past 12 months,
Kemet earned about $4. Still, even at $2 a couple years from
now, Kemetís earnings would mean that todayís price (about
$18) indicates a P/E of 9. And the earnings estimates could
be far too low. As of March 31, the company had $360 million
in cash, no short-term debt, and long-term debt of a
relatively modest $100 million.
Another passenger on the technology gravy train is Arrow
Electronics (ARW), which distributes computer products and
components worldwide. Again, not a creator of innovative
products, but a major player in distribution, itís potentially
attractive as a conservative bet on the continued growth of
information technology markets. Sales have doubled in four
years to $13 billion, and while analysts expect profits to fall
this year, the P/E today, based on expected earnings for
2002, is in single
JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.
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