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What's good for Dell and Cisco is good for you

You do not have to be paying close attention to the technology sector to see there is life there, at least as measured by acquisitions. Hewlett-Packard just announced the $2.7 billion purchase of 3Comm. In the past three months, Xerox paid $6.4 billion for Affiliated Computer Services, Dell paid $3.9 billion for Perot Systems and Cisco, always an aggressive acquirer, paid $44.5 million for the set-top business of DVN Ltd., $3 billion for Tandberg, and $183 million for ScanSafe.

That sophisticated players like these are plopping down billions of dollars for tech companies suggests to me the technology industry may be coming out of its doldrums. I do not pretend to know which companies will be future acquisition targets, but I think technology is certainly worth a look as an investment opportunity, no matter which companies might be acquired.

That's why I screened tech firms using the Guru Strategies I rely on to pick promising investments. The strategy I created based on Peter Lynch's writings is a major tech fan at the moment. Consider Western Digital (WTC), a maker of hard drives. A Morningstar analyst recently called Western Digital "the best performing hard drive manufacturer in the world." Another fan is the Lynch strategy, which categorizes the company as a true stalwart. That's Lynch-speak for a company with growth in the 10% to 19% range. Western Digital's growth has averaged 17.89%, using an average of its three, four and five year historical EPS growth rates.

Lynch's methodology is best known for the P/E/G ratio, which is the price-to-earnings ratio relative to the company's growth rate, and is a measure of how much you are paying for the company's growth. A P/E/G of 1.0 or less is acceptable and 0.5 or less is great. Western Digital's yield-adjusted P/E/G is a perfectly acceptable 0.90. Another good sign is its inventory management. As a percentage of sales, inventories have been falling, which is excellent. In addition, debt is a nice-and-low 13.14% of equity.

Syntel (SYNT), which advises large companies on the use of technology, is another Lynch favorite. This is called a fast grower by the strategy because its growth rate of 25.59%, based on the average of the three, four and five year historical EPS growth rates, exceeds 20%. The company's P/E/G is 0.59, which is excellent, and debt is zero, which is considered very favorable.

Next, there is Synnex (SNX). The company provides product distribution and logistics services to original equipment manufacturers and resellers of computer hardware and software, and numbers IBM and Intel among its customers. This company's growth is 18.15%, based on its three, four and five year average EPS growth rates, so it is a true stalwart. Its yield-adjusted P/E/G ratio comes in at 0.59, an excellent result. Inventories have fallen relative to sales, which is very good, and debt is at an acceptable level.

The last company I want to tell you about is Tech Data (TECD), the second largest distributor of technology products in the US and Israel. A fast grower, its earnings growth rate is 28.24%, based on the average of the three, four and five year historical EPS growth rates. With a P/E of 14.69, its P/E/G is an enviable 0.52. Inventory relative to sales has been pretty constant, which is fine, and debt is but 19% of equity, which is very good.

The Lynch strategy has identified these four tech companies as worthy investments. The big boys in the market are putting down big bucks to get even bigger, which tells me they think the tech industry's future is pretty solid. If you lack tech in your investment portfolio, any of these companies would be strong additions.

Published by Globes [online], Israel business news - www.globes-online.com - on November 19, 2009