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By Pat Dorsey, CFA | 12-06-2010 11:00 AM

Values and Opportunity in Tech

Leuthold's Doug Ramsey, Ariel's Charlie Bobrinskoy, and Tom Forester of Forester Value comment on the prospects for the tech sector, including Microsoft's future in the 'cloud' and Cisco's recent drubbing.

Dorsey: Another sector that shows up I think fairly prominently in both [Tom's and Charlie's] portfolios is technology, especially the mega-cap names, so IBM, Microsoft are in both your portfolios. Tom you're also own Oracle and I think HP as well.

So, again it's fascinating, if you roll the clock back 10 years, and these were all companies trading at utter nosebleed valuations that had one thing on their mind, which was grow, grow, grow, grow, grow. And now you're seeing them maturing and going into mid-life crisis and the valuations associated with that.

Forester: Ten years ago we had 0% weighting in technology. We just couldn't touch them. We were strict valuation discipline, and at 30, 40, 50, 60, 70 times earnings, I mean, there was no…

Dorsey: ... [Laughing] Those were the cheap ones, Tom!

Forester: Yeah. Those were the "values."

Now we will buy Microsoft for 10 or 11 times earnings, which is as good as any other value that's out there right now, that we're seeing right now. And we actually think the fundamentals are pretty strong there. Windows 7 has been a great hit. Vista, I think, had like a 15% or 20% penetration rate amongst corporations. And I think Windows 7 has that much penetration already, and I think there is another 50% additional corporations that are looking to implement that over the next year or two. So we think it's gotten great writeups. It's been a great product for them. Their Office product just came out over the last year or so and has done fairly well. They've got this Kinect. I don't know if you've seen that, if you have kids or not, but when we came out they had a controller that you held and you could play tennis or whatnot. Now you don't need a controller in your hand, you make full body movements. So you can actually – probably pull a hamstring trying to play football or something like that, because it all goes on body movements. And I know they are expecting to sell somewhere between 1 or 3 million of them, and they've already sold 3 million, so now they've upped it to 3 to 5 million, so that could be a big, big product for them this winter, this Christmas season. They seem to be really hitting on almost all cylinders right now.

Bobrinskoy: These technology companies are also a great way to play the emerging markets. They're seeing great growth in China and Russia. IBM had 40% growth in China, 35% growth I think it was in Russia, and Brazil similar numbers, and you're getting them for 10 or 11 multiples.

So we just think it's a great way to play the international trends. A lot of the people that are negative on the market tend to focus on the U.S. economy with 2% and 3% GDP growth, but a lot of these large-cap quality companies have half their business overseas, and so it's a great way to buy, we would say, a global company and global fund at a U.S. market multiple that's much cheaper than those emerging-market multiples.

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