Two Tech Stocks Too Cheap to Ignore

Generally speaking, I am not a big fan of technology stocks for the simple fact that they rarely trade at the type of multiples I am comfortable with. Earnings multiples above 20 are really hard for me to get a handle on, much less the 30 and up P/E ratios routinely seen in tech stocks. That type of valuation leaves almost no margin for error, much less create a margin of safety for investors. But when I get an opportunity to buy a market leader in a growing sector for less than eight times trailing earnings and six times operating cash flow, I feel like I have to pay attention.

The demand for storage space in the computer business is only going to grow in the years and decades ahead. Digital content, including audio and video recordings, continue to explode on the Internet, and the need for large archived email content is also growing. The technology is only going to expand and create more digital content.

Seagate Technology (STX - commentary - Cramer's Take) is the leading disc-drive manufacturer, and ships drives to every segment of the market place, including video games and TV set boxes. They are the overall market leader and the leader in three of four key market segments. The stock has really gone nowhere all year, in spite of decent operating performance and industry leadership.

In the first quarter, Seagate reported that revenue was up 10 % on a year-over-year basis. The total number of units shipped was up 8%, with desktop-drive shipments up 12%, and mobile and laptop drive sales up 18%. Overall the company increased market share by another 3%.

Continuing to deploy its cash in a shareholder-friendly manner, the company bought back $784 million of stock in the quarter, and still have over $2 billion left on the buyback authorization. Seagate has posted a positive earnings surprise the last four quarters in a row, as analysts continue to underestimate the companies operating performance. Trading at just seven times earnings and an EV-to-EBITDA ratio of 4.6, Seagate is becoming the Rodney Dangerfield of technology stocks.

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At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.