3 Value Ideas Among Underperforming Tech Stocks

Chris Lau, Kapitall: The Dow Jones Industrial Average is up 17% over a one-year period, so when technology stocks in this index underperform, it should interest value investors. Microsoft ( MSFT ), IBM ( IBM ), and Intel ( INTC ) are performing poorly. Only Microsoft is up in the same period, while IBM and Intel are down for the year. Microsoft could continue to trend lower, while IBM and Intel could reverse course.

​Click on the image below to see data over time. Sourced from Zacks Investment Research.

Microsoft peaked at $36 in July, but closed recently at around $32. The company wants to boost Windows software sales by updating the operating system. Windows 8.1 “Blue” is scheduled to be released in October, 2013. Even though it will be free for Windows 8 owners, the software giant faces a tough time convincing consumers to upgrade their computers. The new Metro interface is most appealing for computers that have a touch screen. Users still on traditional computers that use a mouse and keyboard will likely stay with Windows 7, while buying an Apple iPad tablet or Android tablet device as a secondary mobile tool. 

When support for Windows XP ends in 2014, sales for Windows 8.x might rise, but for now, investors hoping for a quick rebound might be taking profits instead.

IBM is down 13.3% from a 52-week high. Shares lost traction after the company reported quarterly revenue that missed consensus by $450 million. In Q2, IBM earned $3.91 per share on revenue of $24.92 billion. To reduce costs, IBM forced its hardware staff to take a week off with lower pay. Hardware sales at IBM are struggling. Sales for hardware dropped 12% last quarter. Despite the difficulties, the company expects to earn $16.90 per share in fiscal 2013. This implies IBM is valued at a forward P/E below 11, making shares attractive for investors looking for exposure to the tech sector.

Intel is also down, 13.9% over a one-year period. Last quarter, the company earned $0.39 per share on revenue of $12.81 billion. Both figures missed consensus by $0.01 per share and $90 million, respectively. For 2013, Intel expects growth to be flat. The chip giant previously expected growth in the low single digits.

Intel pays a dividend of $0.90 per share, yielding 4.11%. Investors could consider the last quarter to be an inflection point for the company. Haswell was just released, and sales did not reflect demand for the new chip release. There are risks that demand for laptops and computers could slow down further, but Intel might be providing conservative forecasts for demand. Any indications for stronger demand for Haswell could push shares higher. In the interim, shareholders can collect a healthy dividend while they wait for the share price to rise.

 

Written by Chris Lau, Kapitall  contributor.

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