On the other hand, the cash-rich industry titans are priced way-below their fair values. I expect these companies to beat the market by a large margin over the next five years. Here is a list of seven deeply-undervalued, blue-chip technology stocks:
Company | Ticker | Morningstar Grade | O-Metrix Score | ||
Apple | 5-Star | $430 | 6.4 (B-Grade) | $449 | |
AT&T | 3-Star | $55 | 4.8 (C-Grade) | $32 | |
Cisco | 5-Star | $23 | 5.7 (C-Grade) | $21 | |
4-Star | $796 | 5.7 (C-Grade) | $708 | ||
IBM | 3-Star | $198 | 4.5 (C-Grade) | $180 | |
Intel | 3-Star | $34 | 7.9 (B-Grade) | $26 | |
Microsoft | 4-Star | $46 | 6.4 (B-Grade) | $33 |
The analysts mean target price is derived from finviz. Both fair value and target price are dynamic numbers that change based on future earnings estimates. I estimated the fair values using FED+ Model:
V = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5] + E5 / r + Book Value
The target price is an intermediate-term price target, reflecting the average target price of individual analysts. While the target price is a good starting point, it also reflects Wall Street’s bias towards individual stocks.
O-Metrix is score is determined as follows:
O-Metrix = [(Dividend Yield + Long-Term EPS Growth) / PE Ratio] * 5
Apple is an iconic company throughout the world. People want to know what the driving force behind Apple’s innovation is, and showrooms offer a nice opportunity. Apple’s showroom on the New York City is one of the top tourist destinations. This showroom probably receives more visitors than the Empire State Building.
Besides being a popular company, Apple is the most popular stock among hedge funds as hedge fund managers hedge themselves through Apple. The company has a remarkable growth story. In the last five years, average EPS growth rate has been 60%. In 2006, EPS was $2.27, whereas the ttm [trailing twelve month] EPS is $21.
Apple has shown an outstanding performance in the stock market as well. In the last 10 years, shareholders enjoyed an annualized return of 40%. Thus, $1000 invested in 2001 is worth $29,000 today. While I was on the bearish side of the market at a price of $360 and P/E ratio of 20 in February, the July 1 price of $340 and P/E ratio of 16.3 offers a compelling entry point. I think Apple still has potential for organic growth and is undervalued by 28%. (Full analysis here)
AT&T, a dividend stock pick for the next five years is one of the largest telecommunication providers in the world. The company offers a nifty yield of 5.43%. AT&T has greatly benefited from the exclusive iPhone agreement with Apple. While losing this exclusivity might cost some profits, AT&T is an immensely profitable company with a gross margin of 53% and a net profit margin of 16%. In the last five years, EPS growth was almost 18%. While analysts estimate an extremely conservative EPS growth of 5.9% for the next five years, AT&T is significantly undervalued. Analysts have a mean target price of $32, whereas my model suggests a fair value of $55. AT&T is surely not as popular as Apple, but with a low Beta of 0.66 and ATR (Average True Range) of 0.38, it can provide higher returns with lower volatility. (Full analysis here)
Cisco, the darling stock of the 90s tech-bubble, is trading at almost 80% below its heyday price. Cisco has a 5-star rating from Morningstar. In the last five years, EPS increased by 10% annually. However, the annualized return was -4%. What is more interesting is the strong sell off since November. The July 1 price of $15.86 is almost 40% below its November peak of $24.5. Surely, Cisco was extremely overpriced during the tech bubble. But since then, the company is improving its competitive moat and boosting cash-flow. Since 2001, the fundamentals are getting better but the stock just keeps falling. There is no downside potential left. With a P/E ratio of 12, and an even lower forward P/E of 9.38, Cisco is one of the cheapest stocks among this list. Analysts mean target price estimate of $21 is also very close to my fair-value estimate of $23.
Google, the glorious winner of the internet search engine battle, is also undervalued. While its Chinese competitor Baidu (BIDU) is trading at a P/E ratio of 79, Google is trading at a P/E ratio of 20. The forward P/E ratio of 13.24 is the lowest in Google’s history. Google’s net income of $8.3 billion is 6 times greater than Baidu’s net income of $1.4 billion. Analysts’ annualized EPS growth estimate of 19.29% for the next five years is pretty conservative, given the past five year EPS growth of 40%. Unlike Baidu, Google is a cash-rich company with a current ratio of 4.64, and no long term debt. The stock is trading 20% below the 52 week high and I think the July 1 price of $521 offers a compelling entry point.
IBM, the oldest technology company on the list is a truly global company. The company is best known for its information technology products and services. The global financing segment provides loan and leasing services to end users and internal clients. IBM operates in more than 170 countries and generates about two-thirds of its revenue from abroad. Morningstar gives a 3-star rating to IBM. Analysts estimate an EPS growth of 10.7% for the next five years, which is very reasonable given the past five year EPS growth of 18.6%. Their mean price target is $180, whereas my fair value estimate is $198. As of July 1, the stock was trading at $171. Thus, according to FED+ model, IBM is underpriced by 15%. (Full analysis here)
Intel, the glorious winner of the microchip battle, is priced well below its intrinsic value. California-based Intel produces and sells integrated circuits for computing and communications industries worldwide. It also offers microprocessor, communications, chip, chipset, wireless connectivity, NAND flash memory, and software products as well as handheld devices and software development tools. As of July 1, the company had a market cap of $119.5 billion with a trailing P/E ratio of 10.48 and forward P/E ratio of 9.43. In the last five years, earnings per share increased by 7.5%. Annualized total return was in line with earnings growth. Intel returned 7.2% annually. Intel’s PEG ratio of 0.94 is one of the lowest among similar-sized companies. While the analysts estimate an annualized EPS growth of 11.13% for the next years, the stock is still trading 6% below its 52 week high. I expect Intel to be a star performer with an O-Metrix score of 7.9.
Microsoft is the world’s largest software company and is also among the cheapest stocks in the market. As of July 1, Microsoft was trading with a P/E ratio of 10.33 and a forward P/E ratio of 9.4. The last time Microsoft was priced with such a low P/E ratio was in 2008, at the peak of the financial crisis. Even at that time, Microsoft was priced 5x its book value, whereas the stock is currently priced for only 4x its book value. The stock is up by 7% this past week, but it is still priced 10% lower than the 52 week high. My fair value estimate for Microsoft is $46 per share, which is almost 75% higher than the July 1 price of $26. Microsoft is under-priced primarily due to the gigantic amount of automated sales performed by Mr. Gates. While many shareholders see that as a negative event, I think it offers an opportunity to buy cheap shares of a highly profitable company that pays regular dividends For the latest updates PRESS CTR + D or visit Stock Market news Today
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