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Worried about a correction? Consider Apple and other tech stocks

BY MarketWatch — 10:41 AM ET 04/29/2015

http://stockcharts.com/h-sc/ui?s=AAPL

Information technology is the only sector trading for a lot less than its 15-year average

Are you getting scared by warnings about U.S. stocks heading for a correction?

It could happen -- we're six years into a bull market, after all. Mark Hulbert said last week that a high level of " exuberance" among investors has made the odds of a major decline "unfortunately quite high (http://www.marketwatch.com/ story/investors-exuberance-is-at-a-frighteningly-high-level-2015-04-24)."

So you must be prepared, emotionally, to avoid the human tendency of following the herd and selling as prices fall. Chuck Jaffe wrote a helpful piece this week on how to gird yourself for a market correction (http://www.marketwatch.com/ story/how-to-gird-yourself-for-the-next-stock-market-correction-2015-04-27).

If you're a long-term investor, you might still be wondering which sectors or stocks represent the best value today. They exist, even though the benchmark S&P 500 Index (SPX) is trading for 17.8 times weighted average consensus earnings estimates for 2015 (among analysts polled by FactSet). That large-cap index hasn't traded as high to current-year estimates since 2004.

Technology stocks are cheap

Here's an interesting set of data published by S&P Capital IQ. It shows the forward price-to-earnings ratios, based on earnings estimates for the next 12 months, for all 10 sectors of the S&P 500:
S&P 500 sector Forward price-to-earnings ratio 15-year average forward P/E Consumer discretionary 19.2 19.5 Consumer staples 19.9 16.9 Energy 30.1 13.7 Financials 14.0 14.6 Health care 17.9 17.5 Industrials 16.1 16.3 Information technology 16.1 18.2 Materials 17.3 17.7 Telecom services 13.5 17.3 Utilities 16.2 14.3 Source: S&P Capital IQ
The energy sector is trading at a high forward P/E because the drop in oil prices has caused earnings estimates to tumble, while valuations for many companies have held up in anticipation of a rebound.

But what's really fascinating is that the information-technology sector is trading for 16.1 times forward earnings, compared with a 15-year average of 18.2. That is the only S&P 500 sector trading significantly below its 15-year average.

To be sure, price-to-earnings isn't the only metric to consider. A low P/E ratio, of course, could signal trouble.

Here are the 10 S&P 500 technology stocks trading at the lowest forward P/E ratios: Company Ticker Forward P/E Sales per share - past 12 months Sales per share - year earlier Change in sales per share Micron Technology Inc. (MU) US:MU 8.3 $14.24 $ 14.13 0.8% Hewlett-Packard Co. (HPQ) US:HPQ 8.8 $58.98 $ 58.79 0.3% International Business Machines Corp. (IBM) US:IBM 10.6 $91.17 $ 93.79 -2.8% Seagate Technology PLC (STX) US:STX 11.4 $42.76 $ 42.23 1.3% Xerox Corp. (XRX) US:XRX 11.5 $17.68 $ 17.57 0.6% Western Digital Corp. (WDC) US:WDC 11.5 $63.80 $ 63.62 0.3% Western Union Co. (WU) US:WU 12.3 $10.64 $ 10.60 0.4% NetApp Inc. (NTAP) US:NTAP 12.5 $19.63 $ 19.47 0.8% CA Inc. (CA) US:CA 12.8 $9.86 $ 10.02 -1.6% Cisco Systems Inc. (CSCO) US:CSCO 12.9 $9.32 $9.17 1.6%

Source: FactSet

As you can see, sales growth for this group of large-cap technology companies with low forward P/E ratios hasn't been exactly stellar.

Looking at PEG ratios might be more useful. The PEG ratio is price-to-earnings-to-expected-EPS growth.

Here are the 10 S&P 500 tech stocks with the lowest PEG ratios: Company Ticker PEG ratio Forward P/E Sales per share - past 12 months Sales per share - year earlier Change in sales per share Micron Technology Inc. (MU) US:MU 0.56 8.3 $14.24 $ 14.13 0.8% Avago Technologies Ltd. (AVGO) US:AVGO 0.71 13.8 $18.69 $ 15.69 19.1% KLA-Tencor Corp. (KLAC) US:KLAC 0.74 15.7 $17.11 $ 17.43 -1.9% Skyworks Solutions Inc. (SWKS) US:SWKS 0.86 17.9 $13.35 $ 11.82 12.9% Broadcom Corp. (BRCM) Class A US:BRCM 0.94 14.4 $13.87 $ 13.82 0.4% Apple Inc. (AAPL) US:AAPL 0.95 14.6 $36.31 $ 33.90 7.1% NetApp Inc. (NTAP) US:NTAP 0.96 12.5 $19.63 $ 19.47 0.8% Facebook Inc. (FB) Class A US:FB 0.96 37.1 $4.76 $ 4.43 7.6% Applied Materials Inc. (AMAT) US:AMAT 1.11 14.5 $7.45 $ 7.34 1.5% FLIR Systems Inc. (FLIR) US:FLIR 1.19 17.8 $10.77 $ 10.74 0.3%

Source: FactSet

The forward PEG is calculated by dividing the forward P/E by FactSet's "long-term growth estimate for three to five years," which is based on consensus EPS estimates. A PEG ratio below 1 could mean a company is undervalued because investors aren't fully taking into account its growth potential.

As you can see on the table, looking back at 12 months of sales has a way of smoothing out the numbers. According to FactSet, Avago Technology Ltd's (AVGO) sales per share of $5.88 in its most recent quarter rocketed 112% from a year earlier. That reflected the company's acquisitions of LSI Corp. and PLX Technology Inc. last year.

Apple Inc. (AAPL) , as usual, was the poster child for organic growth, with sales per share for its fiscal second quarter rising 34% from a year earlier to $9.94. The stock has a PEG ratio of 0.95. It's not the cheapest on the list, but it looks attractive, considering the company's sales and profit growth rates.

Read more on Apple (AAPL), its blowout quarter and its stock:

-Philip van Doorn; 415-439-6400; [e-mail]