MW You can still find hot tech stocks as a value investor - if you take this approach

By Laila Maidan

Many tech stocks fall outside of the traditional definition of value, but this portfolio manager says investors should adapt their thinking

Chasing news headlines and hype has become somewhat of a norm in the stock market, as the promise of artificial intelligence has stolen the imagination of investors. And while the growth prospects for companies leading the AI race could be grand, the drive to find winners has sent some stocks soaring, perhaps well above what they're worth.

One way to avoid overpaying for a stock is to estimate how much a company can earn over a given period of time, and then decide whether its stock is undervalued. The approach is traditionally referred to as value investing.

However, value investing has fallen out of favor as people have spent the last few years chasing Big Tech names in hopes of even bigger gains. The Roundhill Magnificent Seven ETF MAGS is up by over 121% since its inception on April 11, 2023. The iShares S&P 500 Value ETF IVE is up by about 31% for the same period, according to Dow Jones Market Data.

Despite the lag, value investors believe they'll get their day in the sun - or perhaps they just need to move to where the sun is. John Buckingham, portfolio manager at Kovitz and editor of The Prudent Speculator, a newsletter that also maintains a portfolio of stocks, said value investors have to adapt and understand what drives the stock market today.

Investors have decided that growth stocks, specifically in the tech sector, are worth more than other stocks, which is why Buckingham has ventured beyond conventional methods to find relatively inexpensive stocks within the tech sector. "I'm a value investor even if the tech portion of the portfolio isn't traditionally value," he said.

The Prudent Speculator Portfolio, which is the newsletter's flagship portfolio, has a median forward P/E of 14.3, compared with 23.3 for the S&P 500, according to tracked data from The Prudent Speculator. Through April 30, the portfolio had an annualized price return of 13.43% since its inception on June 30, 1980, according to The Hulbert Financial Digest. The S&P 500 had an annualized price return of 9.05% for the same period. For the past year, the TPS portfolio had a return of 7.5%. The S&P 500 had a return of over 11%.

There are many ways to measure whether a company's stock reflects what a business is worth. A traditional approach is to look at a stock's forward price-to-earnings ratio, a metric measuring how much an investor pays for every dollar the company is expected to earn. Value stocks trade at relatively low P/E ratios - generally, below a P/E of 20 - assuming the associated companies have steady and mature businesses. But many technology stocks can trade at a forward P/E well above 20. So, if value investors want tech stocks in their portfolio, they may have to take a nontraditional approach.

Another way value investors determine whether a stock is cheap is to compare a stock's current P/E ratio to its historical averages to see if it's trading below its usual range. For example, if a stock that has typically traded at a forward P/E of 25 is now trading at a P/E of 17, and it's still expected to increase earnings, one might conclude it's trading at a discount. Context is important because a stock could have a P/E of 7 and still be considered expensive because of a slowing business. On the whole, this method could help investors compare stocks within the tech sector and assess relative cheapness.

Despite these helpful measures, investors are much more fascinated by growth stocks and the stories that drive them, and they have been less intrigued with a company's financials over the last couple of years, said Buckingham. But tech companies can have strong financials too, he noted. So investors don't need to rely on a story about a company's future; they can look at parts of the business that are already strong as a way to value it. For example, one strength many tech companies have is that they hold a significant amount of cash and have high expected earnings growth, Buckingham said. That means a stock could have the elements of both value and growth.

Kulicke & Soffa Industries Inc. $(KLIC)$ is a company that provides semiconductor-assembly technology, which is in high demand as the appetite for chips and the equipment that helps manufacture them grows, Buckingham said. The company has a forward P/E of 35, putting it outside the range of traditional value, but Kulicke & Soffa is expected to see high earnings growth over the next two years, with adjusted EPS going from 3 cents in fiscal 2024 to $1.39 and $2.24 for fiscal years 2026 and 2027.

Buckingham noted that, while the earnings growth is good, it's coming off a very low earnings base, which investors should keep in mind. The company faced slowed demand due to macroeconomic uncertainty in 2023 and 2024, when interest rates were elevated. That pressured profits. And while tariffs remain a near-term risk, he expects trade deals to be finalized and demand for manufacturing equipment to pick up. Meanwhile, the company has a lot of cash on its balance sheet and no long-term debt, Buckingham said.

Then there are the technology companies that are growth-oriented but also pay dividends. It's like being paid to wait for that growth. For example, Corning Inc. $(GLW)$ provides specialty glass, ceramics, and other materials, some of which supply data centers with required parts. The company's adjusted EPS is expected to go from $1.96 in 2024 to an estimated $2.71 in 2026. Buckingham noted that one added perk of this stock is that it has an annual dividend yield of 2.21%, so investors are somewhat being compensated for holding the stock while they wait for its growth, he said.

Some companies have "sensational" expected earnings growth at a reasonable price, Buckingham said. For example, semiconductor manufacturer Broadcom Inc. $(AVGO)$ is a company that is fueling the development of AI and its shares have a forward P/E of about 34 - again, above the range of what is traditionally considered a value stock. On the other hand, the company's adjusted EPS is expected to nearly double from $4.87 in fiscal year 2024 to an estimated $9.53 in fiscal year 2027.

Value investing often requires patience and a willingness to hold a stock long enough for the market to recognize the company's strengths, and that could take a while. But the outcome could result in finding a value stock that becomes a big grower over time.

-Laila Maidan

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June 13, 2025 08:42 ET (12:42 GMT)

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