2 Undervalued Tech Stocks I'm Looking to Buy As the Market Collapses

Looking to buy the dip? Here are two stocks in high-growth tech companies that I'm looking to pick up from the bargain bin. Before getting into which stocks, though, let's get into why I like them.

Where the growth is
Once upon a time, tech companies were growth companies. Nowadays, tech is a cyclical growth sector -- and, in some cases, just a cyclical sector -- subject to the whims of the economy. That said, within tech there are still growth areas. Thus, no matter what the economic and stock market outlook, these three themes look like good bets for tech investors:

  • Mobile.
  • The cloud.
  • Emerging markets outgrowing developed markets.
  • Business analytics / big data.

Let's make a deal … not
In a weak economy, I want to own stocks in companies that don't need to deeply discount prices to generate sales. In a strong economy, inflation could drive up a company's costs, so I want a company with enough pricing power to protect margins.

What gives a company pricing power?

  • A unique -- or at least superior -- product or service that meets customer needs.
  • Saving customers money.
  • Helping boost a customer's revenue or otherwise making the customer's business more competitive.
  • Becoming a status symbol, particularly with consumers.

Valuation plays
The raging success of Apple's iPad has pressured already slowing PC growth … and the stocks of two companies that own the key intellectual property in PCs. I think the concerns are overblown and these two stocks are undervalued

Intel (Nasdaq: INTC  ) is the clear leader in PC and industry standard server (ISS) processors. The latter is expected to see continued strong growth as ISSes continue gaining a greater share of the server market and as cloud buildouts support strong server demand. Intel is fond of pointing out that every time someone accesses the Internet, there is a server on the other side of the exchange.

What's more, management insists that PC sales in emerging markets are being undercounted because of the higher share that unbranded PCs garner in less developed markets. I agree: Unlike PCs, microprocessors cannot be designed and built in dorm rooms and garages. Thus, Intel, along with competitor Advanced Micro Devices (NYSE: AMD  ) and hard-drive makers Seagate (NYSE: STX  ) and Western Digital (NYSE: WDC  ) appear much better positioned to benefit from emerging-market growth than the PC divisions of Hewlett-Packard (NYSE: HPQ  ) and Dell (Nasdaq: DELL  ) .

Analysts are forecasting 11% annualized EPS growth over the next five years for Intel, yet the stock trades and a paltry 9.3 times P/E ratio and has a whopping 4.1% dividend yield. That makes Intel a nice defensive stock with plenty of upside opportunity.

Microsoft (Nasdaq: MSFT  ) is the leader in PC and ISS operating systems. It also has a strong application software business. It's a combination of a cash cow and a growth business. Because of piracy and the Mac's growing market share, I expect Microsoft to benefit less than Intel from emerging-market growth. That said, risk-averse investors should know it's the only tech company -- and one of only six U.S. companies -- for which S&P reaffirmed its AAA rating on Monday.

Analysts are forecasting 10% annualized EPS growth over the next five years for Microsoft, yet the stock trades at a 9.4 P/E ratio. Its dividend yield doesn't approach Intel's but does beat the S&P 500's 2.1%.

The following tables show how these two stocks stack up versus two high-growth tech stocks -- VMware and ARM Holdings -- and two attractively valued tech greats -- Apple and IBM -- that I'm also looking to scoop up from the bargain bin. Both Intel and Microsoft have grown EPS at least 30% over the last 12 months … at the same time the iPad was accused of slowing PC sales growth.

Company

Revenue Growth, 2009

EPS Growth, 2009

Revenue Growth, Past 12 Months

EPS Growth, Past 12 Months

VMware 8% (33%) 38% 110%
ARM Holdings 2% (9%) 27% 39%
Intel (7%) (16%) 18% 30%
Microsoft (3%) (13%) 12% 33%
Apple 14% 34% 76% 90%
IBM (8%) 13% 7% 16%

Sources: Capital IQ (a division of Standard & Poor's), CNBC.

Company

P/E Ratio*

Forward P/E Ratio*

Dividend Yield*

Price*

Consecutive Quarters of Beating Estimates

VMware 44.7 37.7 0.0% $88.17 12
ARM Holdings 44.3 38.9 0.6% $24.66 8
Intel 9.3 8.6 4.1% $20.60 8
Microsoft 9.7 8.9 2.5% $25.58 8
Apple 14.0 11.4 0.0% $374.01 At least 15
IBM 13.7 12.2 1.8% $170.61 At least 14

Sources: Capital IQ (a division of Standard & Poor's), CNBC.
*P/E ratios, dividend yields, and price are as of the market close on Aug. 9, 2011.

Foolish takeaway
Trying to predict the direction of the economy or stock market may be Fool's folly. Intel and Microsoft appear poised to outperform the market no matter what the future holds. If the economy does turn down, their low valuations and dividends could make them good defensive stocks.

What do you think: Will these tech stocks outperform the market? To help you stay abreast of their prospects, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding these companies to your Watchlist now:

Fool contributor Cindy Johnson owns shares of Microsoft. The Motley Fool owns shares of Microsoft, Intel, and Western Digital and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel and Microsoft, creating a diagonal call position in Intel, and creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 12, 2011, at 10:54 PM, libra4us wrote:

    AMD – ROI & Risks:

    1/2011 – Brazos E- and C-series APUs for low-end laptop/notebook and netbook PCs

    6/2011 – Brazos Z-series APUs for tablet PCs

    6/2011 – Llano A-series APUs for mainstream laptop/notebook and desktop PCs

    8&9/2011 – New generation of chips for servers and high-end desktops

    GPU chips for game consoles

    Die buy instead of wafer buy (Cost control)

    Some products made by TSMC (Cost control)

    Stock shares oversold by 17.6% (as of 7/29/2011)

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