With the Nasdaq composite index closing in on its highest level in three-and-a-half years and investors paying ludicrous valuations for the latest batch of trendy "app" stocks, you might think that the good opportunities for investing in technology are long gone.
But François Campeau, portfolio manager at Trilogy Global Advisors – the subadvisor to the CI Global Science & Technology fund, which is top-ranked by Lipper – sees things differently. Sure, many of the high-fliers look frothy, but not the behemoths.
Perhaps you've heard of the companies in his top holdings: Microsoft Corp. , Apple Inc. , Google Inc. , Cisco Systems Inc. and Oracle Corp.
Given that these household names rank among the biggest technology companies in the world, based on their market capitalizations, they're unlikely to be gobbled up in an acquisition or see their earnings rise exponentially.
The big attraction? Valuations are low.
"These days, tech is so cheap," Mr. Campeau said, pointing out that investors are still waiting for corporations to spend big bucks on technology upgrades.
"I think corporations were burned so badly in 2009, that it took them longer than usual to start spending," he said. "But capital expenditures have been so low for so long that at some point they have no choice but to invest if they want to grow. I think we're at this point now."
Mr. Campeau's approach has worked well. The CI Global Science & Technology fund has a three-year average annualized gain of 12.9 per cent, to the end of January. That is far ahead of the 3.9 per cent average return among the fund's peers in the technology space.
Right now, the fund is certainly focused on large-cap names, drawn mostly from the U.S. market. According to Lipper, the fund's 33 holdings have an average market cap of nearly $95-billion (U.S.), which is more than 50 per cent bigger than the average among its peers.
However, Mr. Campeau's interest in the big guys is relatively new. A couple of years ago, he didn't have to pay much for fast-growing companies, including in the red-hot, cloud-computing space.
Now, many of these high-fliers command astronomically high valuations – most notably SalesForce.com Inc. , whose shares have surged 350 per cent over the past two years and trade at nearly 160-times estimated earnings.
Mr. Campeau, who is from Montreal but now works in New York, cut back his exposure to most of these frothy stocks. Instead, his investment process – which uses a series of screens to find stocks with good valuation, growth, return on equity and free cash flow – steered him toward companies like Microsoft and Apple.
Of course, Apple is a hot name itself, and the recent success of its iPad tablet computer – which followed the enormous popularity of the iPhone and the iPod – has driven the shares to record highs.
But Mr. Campeau argues that from a valuation perspective, the shares are actually not expensive. They trade at just 13 times estimated 2012 earnings, which isn't much for a company that is a leader in consumer gadgets.
"Apple is almost at the beginning of two big cycles: the mobile smart phone and the tablet," he said. "I think penetration is low."
Microsoft doesn't have the same cachet among consumers, despite its popular Xbox gaming console, but Mr. Campeau believes that the company's exposure to corporate spending makes it a compelling stock.
Its valuation, he said, is "kind of ridiculous" given that its earnings on a per-share basis are forecasted to grow 24 per cent this year and 11 per cent next year.
"I have an iPhone and an iPad – but I still use Windows at work, and I'll probably use Windows in 10 years," he said. "This is a beautiful way to play a rise in corporate spending at a very cheap price."
However, Mr. Campeau isn't attracted to tech stocks simply because they are cheap. Research In Motion Ltd. , the Canadian-based company that makes the BlackBerry phone, also trades at a low valuation – but for a reason: The company is struggling against Google's Android-based phones on one side and Apple's iPhones on the other, even among corporate users who are increasingly turning to phones that come with the most applications.
"They are stuck in a corner," he said. "It doesn't look good."