Computer Hardware: Recession-Proof?

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28, so we'll get more information then.

Why are PC sales so good?

I think there's strong consumer demand for laptop computers. Consumers can do a lot more with a PC now than 10 years ago, when it was mainly word processing and spreadsheets. Now you can handle your images, your movies, your music. That has broadened the market. There's also smaller sizes, better batteries, and a number of other improvements.

Recent updates in operating systems from Microsoft (MSFT) and Apple might also be spurring sales. People don't want cords all over the place, so they're buying a cordless mouse, and perhaps a camera, which is driving sales for peripheral makers including Logitech (LOGI). And in developing economies, there's first adopters and faster economic growth.

With price competition staying intense, how can computer makers gain an edge and increase market share?

One way is through product differentiation, like Apple's operating system as a difference from Microsoft's on the high end. On the low end, it might be simply making a color on the PC—they all don't have to be dull gray or black. And in design, Apple has the MacBook Air for extreme portability—it's small enough to fit in an envelope. They're making different models for various audiences.

Dell has a different approach for its design strategy. Dell tries to customize computers for certain large audiences. For instance, they have partnered with companies like Wal-Mart (WMT) to figure out what's the most typical format or computer set-up that Wal-Mart customers would want. That way it can limit the number of computer types and avoid building up inventories of PCs that might not sell—that was a big threat when they went from the direct-sales model to the store model. Customizing PCs by knowing your customers well might give Dell an advantage.

Apple has its own stores. It tries to create an elite aura and assure people they're buying a well-thought-out electronic device. You feel like you're getting the best equipment out there, and you're not settling for price.

Which stocks do you like?

We have strong buy opinions on HP and IBM (IBM). A U.S. slowdown is only a partial slowdown for IBM because it's so large and global. We have a buy on Dell.

Apple is ranked a sell—it's a valuation call. Why? On its latest earnings conference call, Apple took some pains to tell everyone how they had many product launches, but to make these new products it's going to spend money. It guided lower for gross margin for this quarter and coming quarters, as it goes toward a larger mass market. This is not uncommon for a tech company that targets an elite group. At some point, they may say we're going after the mass market and will see lower gross margin. Then there can be several years where EPS growth gets flattened out.

If EPS growth is flattened, I wonder why I should be buying a stock at a 34 price-earnings multiple. My 12-month target price for Apple shares is 140. The risk to my thesis is that Apple's revenue could turn out to be bigger than I think and erase potential harm from lower gross margin. And investors might still pay a higher p-e for Apple. Some positives for Apple are it has a lot of cash on hand, no debt, and several product lines.

I like the big computer hardware makers and their valuations—HP, IBM, and Dell are trading around 15 to 18 times trailing earnings. Then you have Apple's p-e at 34. Is it that much better? Maybe. I say no right now.