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Computerized Investing > Third Quarter 2013

Tech Valuations Belie Market Heights

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by Wayne A. Thorp, CFA

Much has been made in the popular press recently of the S&P 500 index hitting an all-time high, at least on a nominal basis. This run-up has some investors and analysts fretting that the market is becoming overvalued and, thus, poised for a pullback. When looking at technology stocks, however, the story is very different. According to a recent InvestmentNews article, tech stocks are trading at their lowest valuations since 2006, and potentially could fall even farther as consumers and government agencies alike cut spending. Technology bellwethers such as Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Intel Corp. (INTC) all have forward price-earnings ratios that are at least 25% below their seven-year historical averages (according to data in AAII’s Stock Investor Pro fundamental stock screening and research database as of May 31, 2013).

If you are a contrarian investor, these low valuations offer an attractive buying opportunity, especially considering that technology issues tend to lead the way during periods of economic expansion. If you have been paying attention to recent economic news, it appears that the U.S. economy has turned a corner. So, if you believe valuations eventually revert back to the mean, these low historical valuations offer tremendous upside potential.

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