TCS Daily


Top 10 Tech Stocks

By James K. Glassman - June 12, 2000 12:00 AM

Two weeks ago, I wrote in the International Herald Tribune that big technology stocks were attractively priced. Since then, of course, many of the great tech names have rallied, but I still believe there are some good buys among the New Economy giants.

Every investor should own technology stocks - which currently comprise about one- third of the value of the Standard & Poor's 500 index, a common proxy for the U.S. market as a whole. If you're building your own high-tech portfolio, you should concentrate on the biggest, best-run firms - the ones that have shown the flexibility to adapt to a wild, cutthroat marketplace and the ability to make lots of money.

Bears grumble at the high stock prices of companies like online retailers Amazon.com Inc. and Priceline.com Inc., which have never made a profit. Fine.

Stay away from them. But don't ignore companies that are rolling in dough, like Oracle Corp., Dell Computer Corp. and Cisco Systems Inc.

I recently decided to compose a portfolio of the Tech Top Ten - very profitable U.S. companies, each with strong international sales, a solid balance sheet and a market capitalization (that is, value according to investors) of $100 billion or more. Some of these stocks have taken a beating in recent months. Cisco has fallen from a high of $82 two months ago to $64.38 last Friday. America Online Inc. has dropped from $95.81 to a recent $54.75. None of the sharp declines was the result of business problems. Each of the 10 companies remains a powerhouse in its field.

Cisco dominates the Internet infrastructure business; Dell is the top online computer retailer; and AOL is the leader in getting consumers onto the Net. In addition to Oracle, Dell, Cisco and AOL, my Top Ten includes EMC Corp. , the top maker of "data-storage," or computer memory, devices; International Business Machines Corp.; Intel Corp., the world's largest manufacturer of the semiconductors that power computers; Microsoft Corp.; Sun Microsystems Inc., maker of high-end integrated software and hardware, as well as the owner of Java; and Hewlett-Packard Co., a diversified firm that makes printers, computers and other devices.

Together, the 10 companies have a market value of more than $2 trillion, or about half the market capitalization of all the stocks in France, Germany and the rest of the euro zone. Do they deserve it? I think so. And so does the conservative Value Line Investment Survey, which gives a "1" rating (tops) to five of the companies; a "2" to two others; and a "3" (average) to IBM and Microsoft. (Value Line currently has no rating on HP while it's in the process of spinning off a division to shareholders.)

Consider Intel. On $29 billion in revenues in 1999, Intel earned an incredible $7.3 billion. Intel also has a sparkling balance sheet, with a top ranking of A++ from Value Line for financial strength. Its earnings have been growing at 20 percent annually, but its P/E is only 55. IBM, whose earnings are expected to grow at 16 percent annually for the next five years, has a P/E of 29. Sun, which has doubled its revenues and tripled its profits since 1996, has a P/E of 99. Cisco is probably the most impressive of all: Revenues have risen from $4 billion to $17 billion and profits from $1 billion to $3 billion in less than four years. Cisco carries a P/E of 179, which sounds scary but is, I believe, pretty reasonable.

Of course, any decision on reasonableness you will have to make yourself.
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