The Most Remarkably Mispriced Name in the Market

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That's the way legendary investor Bill Miller described IBM (NYSE: IBM  ) in an interview at the 2010 Morningstar Investment Conference at the end of June, adding that the stock is "30%-50% underpriced, yet no-one seems to care about it." That's the sort of statement that commands investors' attention.

Making green on Big Blue
Miller was lionized for beating the S&P 500 15 years running, through 2005. While he has lost some of his sheen since then as his Legg Mason Value Trust fund suffered several years of poor performance, he remains a smart, rigorous investor. Regardless of his reputation, the case he builds for IBM shares stands on its own merits. In particular, Miller pointed out that:

  • Over the past five years, the company has doubled its operating earnings per share and increased its dividend by more than 20% a year.
  • In 2010, the company will achieve record earnings and operating margins, something it already did in 2008, in one of the toughest economic environments since the Great Depression.
  • The shares are trading at just 11 times this year's earnings and 10 times next year's earnings.

IBM ... and the others
In fact, IBM isn't the only megacap tech stock that looks cheap right now. Six of the eight technology companies in the S&P 500 with a market capitalization in excess of $100 billion trade at less than 13 times estimated earnings for 2010. IBM is one of them, and the other five are:


P/E Multiple*

Long-Term EPS Growth Estimate

Oracle (NYSE: ORCL  )



Hewlett-Packard (NYSE: HPQ  )



Intel (Nasdaq: INTC  )



Cisco Systems (Nasdaq: CSCO  )



Microsoft (Nasdaq: MSFT  )



*Based on closing prices on July 6, 2010. Source: Capital IQ, a division of Standard & Poor's.

Putting the idea into practice
I think all are worth looking at right now, but I would start with Intel, Cisco Systems, and Oracle because I think their business risks are lower. Another way to play the underpricing in this segment is the SPDR Select Sector Technology ETF (NYSE: XLK  ) . The six companies I mentioned represent over a third of the value of this exchange-traded fund -- I think the odds it will outperform the broad market over the next three to five years look favorable.

IBM shares look interesting, but Tim Hanson has identified the biggest investment opportunity this year.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Intel and Microsoft are Motley Fool Inside Value picks. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy. The Motley Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (70)

Comments from our Foolish Readers

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 July 08, 2010, at 8:04 PM, d1franko wrote:

    Part of the problem is that IBM get's lumped in with the likes of Dell, HP, Cisco, Intel, Microsoft and AMD. This category of products represent less than 5% of IBM's business. If Dell and HP took 100% of the x86 business from IBM, it would be a nit compared to the size of the rest of their business. But still, Dell has a bad quarter, IBM stock takes a hit, Microsoft has a bad quarter, IBM stock takes a hit, HP has a bad quarter, IBM stock takes a hit, you get the picture. IBM is it's own animal, falling in many categories like research, software, services, hosting etc. Until investors and fund managers recognize this, IBM will be undervalued. Steering clear is the safe play IMHO as the market does not currently reconize it's business value properly.

  • Report this Comment On July 08, 2010, at 8:07 PM, blesto wrote:

    I once heard it said that "Nobody ever got fired for buying IBM"

  • Report this Comment On July 08, 2010, at 8:47 PM, TMFAleph1 wrote:


    Ha! I'm not sure they were talking about fund managers when they said that ;-)

    Alex D

  • Report this Comment On July 08, 2010, at 10:04 PM, mickeyc21 wrote:

    Bill Miller is down over 50% over the last decade. IBM has nearly doubled since its 2009 lows.

    I love these articles.

  • Report this Comment On July 09, 2010, at 1:33 AM, TMFAleph1 wrote:


    Bill Miller isn't down over 50% over the last decade. Even if he were, that is completely irrelevant to the points he makes regarding IBM.

    There are numerous stocks that have doubled or better off their 2009 lows -- so what?

    Alex D

  • Report this Comment On July 09, 2010, at 1:33 PM, mickeyc21 wrote:


    1) He is down over 50%.

    2) If you use someone as a guru to be followed - "legendary investor Bill Miller" - he should be legendary for something other than complete failure.

    3) You think the time to buy value stocks is when they have doubled?!

    4) "Better to remain silent and be thought a fool, than to open your mouth and remove all doubt." Mark Twain

  • Report this Comment On July 09, 2010, at 3:56 PM, mikecart1 wrote:

    IBM is old news. AAPL is where its at.

    Computers are a thing of the past. Soon everyone will be typing on iPads.

    And I hate AAPL.

    If you want honesty, check out my blogs. I deliver the news raw and lethal!

  • Report this Comment On July 09, 2010, at 5:28 PM, sgordonson wrote:

    Hmm IPADS will rule the world, I guess you don't know what runs in the cloud , big fast servers, besides most of IBM's business is services and software only about 15% comes from heavy metal .

  • Report this Comment On July 14, 2010, at 4:41 PM, KARABALIS wrote:

    IBM is a great company. They have survived and changed when circumstances looked bleak. They have the organization in place that can meet the needs of their corporate clients.

  • Report this Comment On July 18, 2010, at 10:14 AM, wolfhounds wrote:

    I sold IBM about 10 years ago. The price was something over $100. Had I held it these 10 years and reinvested dividends I would have easily beaten the S&P which has returned zero. So what. With far less risk, I could have bought 10 year treasuries yielding 4.5-5%. Since the heyday of the big servers vanished, IBM has turned to a very competitive services model which has yielded small overall revenue increases. They can continue firing employees only so long; 10,000 planned in the U.S. this year alone while hiring 5,000 in India. Check out their headcount for the past 5 years.

  • Report this Comment On July 21, 2010, at 2:35 PM, schwilling911 wrote:

    Man Bashers get a life this Man is doing his job that he is paid for if you don't agree with him move on to the next article. No one can predict the future not u or him.

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