5 Cheap Blue-Chip Tech Stocks: Opinion
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (MagicDiligence.com) -- Take a look at the large-cap screens from Joel Greenblatt's Magic Formula Investing (MFI) screen and one thing jumps out: the number of large, blue-chip tech firms.
To be sure, MFI can screen stocks for the wrong reasons.
One-time, nonrecurring revenue windfalls can distort both earnings yield and return on tangible capital, the two statistics used by the strategy to rank stocks.Sometimes, MFI identifies stocks with poor balance sheets. And, of course, some companies deserve to be priced cheaply, owing to a clearly failing business model as new trends or technologies take over for their once-attractive products or services. None of these are the case with the five tech firms I discuss below. All are current MFI stocks with legitimately low stock prices and legitimately high returns on capital. All have solid balance sheets and more than half pay a dividend. All sell well below even their five-year average low price-to-earnings ratios. And although the consumer PC has likely seen its heyday, tech is far from a dying industry. Mobile computing devices are growing rapidly. Enterprise and emerging consumer demand for cloud services is leading to rapid build out of huge data centers. And to transmit data between the two, service providers are trying to keep up with massive data traffic growth with new IP network infrastructure. All of these trends point to future growth for these firms -- not the declines they are pricing in. Here are the five blue chip tech firms that look like great investments at current prices: Dell (DELL)
Current Earnings Yield: 18.2%
Five-Year Average Earnings Yield: 10.5%
Current P/E: 7.6
Five-Year Average Low P/E: 12.2 Why It's Too Cheap: Here's a simple illustration. Trailing 12-month operating earnings are $4.5 billion. For fiscal 2007 (basically calendar 2006), total operating earnings were $3.1 billion, yet the stock price hovered in the mid-$20's. The market was wrong then, and its wrong now. Dell's current operating margin of 7.3% is far above its historical 5.5% average -- a huge difference on a $60 billion dollar revenue base. And with the firm's new focus on services, software and data center products, higher margins should be sustainable. Dell has a great balance sheet and generates voluminous free cash flows. The company also stands to benefit from the uncertainty around Hewlett-Packard's (HPQ) PC unit.
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