Tech investors often chase hot stocks in high-growth industries, hoping that they become hugely profitable multi-baggers. But many of those hot stocks have unsustainable valuations which cause them to plummet during market downturns.
Therefore, value-minded investors should take a more disciplined approach and look for cheap tech stocks which others have overlooked. To narrow down this field, I look for stocks which have P/E ratios lower than industry averages, 5-year PEG ratios lower than 1, and three or more quarters of positive annual earnings growth. Two fairly solid stocks pass all three tests -- Integrated Device Technology (NASDAQ:IDTI) and Hanwha Q Cells (NASDAQ:HQCL).
Integrated Device Technology
Integrated Device Technology manufactures mixed-signal semiconductors for communications infrastructure, computers, and consumer electronics. The company recently expanded into the connected car market with its acquisition of German chipmaker ZDMI.
IDT supplies the wireless charging chip for the Apple Watch, and there's been speculation that Apple will also ask it to add wireless charging to the next iPhone. However, IDT stock has slumped 14% since the beginning of the year due to ongoing concerns about a semiconductor slowdown, lower spending from telcos, and Apple suppliers in general. The stock plunged back in February after it issued soft guidance for the fourth quarter, but gradually recovered after the report in May exceeded lowered expectations on the top and bottom lines.
During that quarter, IDT's revenue rose 20% annually to $189.4 million, beating estimates by $2.2 million and representing its 10th consecutive quarter of sales growth. That growth was fueled by robust demand for its communication infrastructure, automotive, industrial, and wireless charging technologies. Non-GAAP net income (boosted by a tax benefit) rose 12.4% to $51.5 million, or $0.36 per share, beating forecasts by three cents.
IDT currently trades at 18 times earnings, which is much lower than the industry average of 33 for broad line semiconductors. Analysts currently expect the company to post 18% annual earnings growth over the next five years, which gives it a 5-year PEG ratio of just 0.8.
Hanwha Q Cells
Hanwha Q Cells is a Korean manufacturer of solar modules and developer of downstream solar farms. The company sells its solar products in Asia, Europe, and North America. Electric power company NextEra (NYSE:NEE) is notably one of Hanwha's biggest customers.
However, shares of Hanwha have fallen 45% since the beginning of the year due to softness in solar demand (caused by lower fossil fuel prices) and a top line miss last quarter. Hanwha hasn't satisfied the single analyst (from Roth Capital) covering the stock, but its growth figures and valuations still look attractive.
Revenue rose 54% annually to $514.9 million, missing expectations by $27.6 million but holding up well against its 54% sales growth in the prior quarter. Total module shipments reached 912 megawatts (MW), exceeding its own guidance range of 850 MW to 900 MW. Gross margin also expanded from 14.5% a year earlier to 21.2%. The company reported net income of $27.5 million for the quarter, compared to a loss of $20.4 million a year earlier. That translates to $0.33 per diluted American Depositary Share (ADS), (each ADS represents 50 of the Company's ordinary shares) which beat expectations by nine cents.
Hanwha currently trades at 11 times earnings, which is significantly lower than the average P/E of 19 for specialized semiconductor companies. The solar industry will likely remain volatile in the near term, but Hanwha's annual earnings are expected to grow a whopping 70% over the next five years. That gives it an extremely low 5-year PEG ratio of 0.1.
But do your due diligence first
IDT and Hanwha both look fundamentally cheap, but they've also fallen out of favor with investors. IDT is being weighed down by concerns about Apple and semiconductors, and Hanwha is being crushed by bearishness across the solar industry.
Therefore, investors should dig deeper to see if both companies can keep growing their earnings in the face of tough market headwinds. If they can, both unloved stocks could be huge bargains at current prices.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.