Investing

UBS Says Technology Stocks Are Cheap: Secular Growth and Value on Sale

The technology analyst team at UBS A.G. (NYSE: UBS) firmly believes that the U.S. technology stocks are cheap and should be bought. They point out that these stocks to buy are trading at an unjustified discount to the broader market despite its solid growth. Historically, investors have been well served by buying tech shares when the sector trades at less than 15 times earnings, which is the case today (the sector trades at 13.6 times earnings). Since 1989, the median 12-month forward return under such conditions has been 20%. Perhaps more importantly, downside risk has been quite limited when sector price to earnings ratios have been this low.

Earnings growth for the U.S. technology sector will outpace the market over the next few years, in their view, based on secular growth drivers (mobility, cloud computing, online advertising, e-commerce), exposure to fast-growing emerging markets and pent-up enterprise demand.

With all of those factors in play the have a list of top technology stocks to buy now.

Apple Inc. (NASDAQ: AAPL) is the elephant in the room. Loved as a technology icon less than a year ago, the stock has lost its love affair with Wall Street analysts. UBS maintains that three drivers of growth the iPhone, iPads and PCs ultimately will reignite the story. The Thomson/First Call estimate for the stock is $530. Investors are paid a 2.7% dividend.

Cisco Systems Inc. (NASDAQ: CSCO) is another technology story from the past fighting back into contention. The company has restructured operations and reset growth expectations for the future. The consensus price target for the stock is at $26. Investors are paid a 2.8% dividend.

Qualcomm Inc. (NASDAQ: QCOM) has seen its chip business suffer due to lack of capacity and pricing pressure. UBS thinks the capacity issues are behind them and margins are set to return to normal levels. The consensus price target for the stock is $77. Investors receive a 2.2% dividend. A move to the target represents a gain of more than 20%.

SanDisk Corp. (NASDAQ: SNDK) is well positioned with the limited number of NAND flash suppliers for continued success. UBS believes mobility and the migration of enterprise storage to solid-state alternatives will drive demand going forward. The consensus price objective for the stock is $66.

Investors wanting to be involved in the technology sector in a more diverse manner have several good options. One good avenue is the Columbia Seligman Premium Technology Fund (NYSE: STK). This closed-end fund has a total return objective while using a covered-call writing strategy. It trades at a discount to its net asset value. The fund pays a quarterly dividend of 0.4625 per share, which equates to a 12.33% dividend. With the majority of the funds holdings in the top U.S. technology stocks, and a solid income stream, it may be a solid way to play the sector. The fund does not use leverage of any kind to generate higher return.

Another way for investors to play the technology trade is the Technology Select Sector SPDR (NYSEMKT: XLK). This is a more fundamental way to have an index type trade on the technology sector, without the higher income component. With a low 0.18% expense ratio, and every major U.S. technology stock in the portfolio, investors have a wide exposure to the sector. The fund also pays a 1.77% dividend to shareholders quarterly.

Technology by any measure is cheap compared to the rest of the market. Investors should consider the historical gains in the sector when trading at such low price-to-earnings levels. If history is any guide, then gains are there for the taking for the patient portfolio.