One of the key goals in tech investing is to focus on dominant companies that sport attractive valuations. There's even an acronym for it: GARP (growth at a reasonable price). Yet how you define this approach can get tricky. Should you focus on stocks that have extremely low valuations, with perhaps only modest growth prospects? Should you focus on companies that are sporting sizzling growth and robust -- but not ridiculously rich -- valuations? Or should you try to focus on companies with a mix of solid growth prospects and mid-range valuations?
If you can't decide, then don't worry. I've found three tech stocks that land into each camp and, if taken together, then they may give you the perfect GARP positioning.
1. Polycom (Nasdaq: PLCM): Cheap and unloved
This maker of video and audio-conferencing equipment has stalled out after a solid growth spurt, which saw sales rise more than 150% to $1.5 billion between 2005 and 2011. The global economic crisis has led enterprises to hold off on new equipment purchases that aren't seen as vital to ongoing operations. As a result, sales are expected to drop 5% this year and rebound only modestly in 2013.
Yet a flat top line is masking an important change that will affect the company's bottom line. Polycom is rolling out new products that focus on high-margin software and away from low-margin hardware. As a result, although earnings are likely to be stuck at around 70 cents a share in 2012 and 2013 as the product transition takes hold, they are expected to rise back up to around 90 cents a share in 2014, thanks to expanding profit margins.
Investors initially applauded these new product plans, but those gains have already evaporated in this tough market.
Until Polycom's profit picture strengthens, investors can focus on the company's $630 million net cash balance, which accounts for a hefty 39% of the entire market value of the company.