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5 Undervalued, Unloved Technology Stocks

BOSTON ( TheStreet) -- Technology stocks, which led the equity market in the past two months, fell sharply after Cisco (CSCO) revealed earnings and sales guidance that trailed analysts' expectations on Nov. 10. Cisco has tumbled 19% since then. Other technology stocks have been punished. Here are five high-quality technology companies selling for bargain prices. They are ordered by forward earnings multiple, from cheap to cheapest.

5. Microsoft (MSFT - Get Report) is the world's largest software company, selling the Windows operating system and Office product suite. It's a Dow component and technology bellwether. Since 2007, it has grown sales 6.7% annually, on average, and boosted earnings per share 11% a year. Yet, its stock suffered 9.1% annualized losses over that span.

Quarter: Microsoft's fiscal first-quarter profit increased 51% to $5.4 billion. Earnings per share advanced 55% to 62 cents, boosted by a smaller float, beating the consensus by 13%. Revenue grew 25% to $16 billion. The gross margin widened from 83% to 85% and the operating margin rose from 35% to 43%. Microsoft held $44 billion of cash at the end of the quarter and $11 billion of debt, translating to a quick ratio of 2.1 and a debt-to-equity ratio of 0.2. It increased its dividend from 13 cents to 16 cents, equaling a yield of 2.5% with a 24% payout ratio.

Valuation: Microsoft trades at a sizable discount to comparable technology investments. Its stock sells for a trailing earnings multiple of 11, a forward earnings multiple of 9.5, a sales multiple of 3.3 and a cash flow multiple of 8.4, 65%, 55%, 79% and 50% discounts to software industry averages. Its PEG ratio, a measure of value relative to predicted long-run growth, of 0.7 signals a 30% discount to estimated fair value. Of analysts covering Microsoft, 30 advise buying its stock and 11 recommend holding. None say to sell. A median target of $32.95 implies 27% upside.

Catalyst: With nearly $34 billion of net cash, Microsoft has ammunition for buybacks, dividend boosts and acquisitions, all of which are beneficial to shareholders. It has completed two acquisitions, for Sentillion and AVICode, in 2010. A deal for 3D-sensing-technology firm Canesta is currently pending. Microsoft Kinect, a sensing technology compatible with its Xbox 360 gaming console, sold one million units in the first 10 days of availability.

Bullish Scenario: Stifel Financial expects Microsoft's stock to rise 54% to $40.

Bearish Scenario: FBR Capital Markets predicts the stock will climb 8% to $28.
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