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 Inc. and 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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