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Stock Strategist

Should Investors Buy the Tablet Hype?

The tech industry is producing some shiny new toys, but the sector looks overheated.

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The tech industry thrives on hype. From the heyday of Pets.com in the dot-com bubble era to the touting of 3-D TV at the Consumer Electronics Show this year. The last few weeks have featured the almost deafening hype for  Apple's (AAPL) tablet computer, which is widely expected to be announced at a press conference later today.

It shouldn't be too surprising that this Apple product is creating so much buzz. First off, Apple's rabid, loyal fanbase combined with the firm's legendary secrecy tends to boost the interest level on anything going on in Cupertino. Second, if the rumors are to be believed, a big component of the tablet device will be electronic versions of books, newspapers, and magazines. Apple is hoping that the novelty of the device will convince users to pay for content (through iTunes, naturally) they are currently getting for free over the Internet. This could be a boon to the publishing industry. As such, news editors and reporters are particularly keen on keeping track of developments surrounding the tablet.

So should investors buy the hype? For the most part, the answer is no. Apple has a track record of delivering on overhyped products (see iPhone). But anyone who read the firm's earnings release earlier this week already knows this. Much of the potential upside of any new device is likely already priced into the stock. Shares are currently trading very close to our fair value estimate, and although our Apple analyst Toan Tran believes that the tablet could very well provide some upside, it isn't likely to be a game changer in the way the iPhone was.

So if Apple shares don't look like a screaming bargain, maybe there are opportunities elsewhere in the tech space? Perhaps all the excitement around the new Apple device is indicative of a climate where consumers will be eager to buy all sorts of electronic goodies, boosting the prospects of the entire sector. Alas, even if this is the case, the market is generally overvaluing this potential growth. Taking a look at our market valuation graph, which rolls up the fair value estimates to arrive at a sectorwide price/fair value ratio, shows that tech is no bargain. The hardware and software sectors are each currently more than 10% overvalued.

So instead of the tablet uncovering great investing opportunities, it may be another example of the value investing maxim: Avoid what's popular. Our analysts are certainly factoring in a return of consumer and enterprise IT spending, but it looks like the market is just a little bit carried away.

To see which stocks look the most overhyped, we used the  Premium Stock Screener to find one-star stocks in the Hardware or Software sector. Results are in the table below. Run the screen for yourself  here.

 

Name Ticker Market Cap ($mil) Total Return 1 Yr (%) VMware, Inc.  (VMW) 18,992 113.98 ASML Holding NV  (ASML) 13,959 100.49 Salesforce.com, Inc.  (CRM) 8,170 137.85 Citrix Systems, Inc.  (CTXS) 7,700 78.68 Cerner Corporation  (CERN) 6,738 132.77 Flextronics International, Ltd.  (FLEX) 5,337 149.81 Red Hat, Inc.  (RHT) 5,312 92.54 ARM Holdings PLC ADR  (ARMH) 3,983 162.00 Rovi Corp  (ROVI) 3,079 131.09 Veeco Instruments, Inc.  (VECO) 1,123 551.14 3PAR, Inc.  (PAR) 653 39.37

Data as of Jan. 26, 2010

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.