Have Patience with Technology Stocks

VIDEO: Neuberger Berman managers believe certain technology equities are still cheap and with good prospects, and the US housing market is set up for a nice recovery--Part 2

Javier Sáenz de Cenzano, CFA 27 October, 2010 | 3:09PM

In the second of a two-part interview, Javier Sáenz de Cenzano, Director of Fund Analysis for Morningstar in Spain, talks to Marvin Schwartz and Henry Ramallo, fund managers for UBAM Neuberger Berman US Equity Value about their view on the information technology sector, financials, and the US property markets. The managers currently have 25% of their portfolio invested in six technology companies, which they believe are still relatively cheap. To view their take on US equity markets overall and the energy sector, watch the first part of this interview.

Javier Saenz de Cenzano: Okay, now moving on to the information technology sector; it is a sector where you've building a position over the last couple of years; it is now quite a significant chunk of the portfolio. What's the story there? What are the main drivers of the sector? What kind of companies are finding? I see in your top ten holdings, companies like Microsoft, IBM, Hewlett-Packard. What's the view on that and what's the main rationale for those companies?

Marvin C. Schwartz: As you pointed out earlier, we have approximately 25% of the portfolio invested in technology. It consists of six companies. I believe five of the six companies are debt free, generate big amounts of cash, and sell at very low price earnings multiples. Our largest single investment in the portfolio is IBM. The stock is selling at 10.5 times next year's earnings. The management has publically forecast that the earnings are going to grow to $20 a share minimum by 2015. That compares to $10 a share in 2009. Our own analysts believe that the real earnings in 2015 will be higher than that. We believe that IBM is a stock that could double in value in the next three to four years.

Another stock in that space, that's incredibly cheap right now, is Hewlett-Packard. This stock was selling a few months ago at $53 a share. The Board of Directors of the company made a decision that we disagree with and others do too, to remove its highly capable Chief Executive Officer, Mark Hurd; he was one of the finest CEOs of any company in the United States. As a result of his removal, the stock got very weak. It is selling right now at eight times earnings. The management of the company recently revised upward their earnings for next year to about $5.10 a share and they announced a huge share buyback program which they are in the process of implementing. We think this stock will have significant appreciation over the next 12 months.

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About Author

Javier Sáenz de Cenzano, CFA

Javier Sáenz de Cenzano, CFA  Director de Análisis de Fondos para Morningstar en España y en Italia

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