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2 High-Quality Stocks to Buy on the Cheap

By Harsh Chauhan – Apr 25, 2020 at 8:46AM

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These two tech companies could hold their ground in the current circumstances.

The novel coronavirus outbreak led to a massive stock market correction in 2020, as evident from the 12.5% drop in the S&P 500 so far this year. Though the market has rallied over the past few weeks (it was down as much as 30.7%), some top-quality tech stocks continue to remain cheap thanks to the correction.

Microsoft (MSFT -0.97%) and Fortinet (FTNT 0.28%) are two companies that have beaten the broader market this year thanks to the utility of the products and services they provide. Yet their stock continues to trade at attractive levels despite rallying of late.

Microsoft's cloud services and Fortinet's cybersecurity offerings may continue to remain in demand despite the economic fallout of the COVID-19 outbreak. What's more, both companies look well-positioned to weather the economic crisis COVID-19 may bring. Let's take a closer look at the reasons why it may be a good idea to go long on Microsoft and Fortinet.

^SPX Chart

^SPX data by YCharts

1. Microsoft could get a shot in the arm because of the coronavirus

Microsoft's resilient stock market performance isn't surprising at all, really. The services and products it offers are well suited to take advantage of the stay-at-home directives ordered by governments across the globe to contain the outbreak.

An increase in telecommuting, online education, and gaming has led to an increase in demand for cloud computing and communication platforms such as Office 365 (recently re-branded as Microsoft 365). At the end of March, Microsoft said that it witnessed a 775% monthly spike in the usage of its Teams app -- which allows workplaces to collaborate online -- in Italy, where strict shelter-in-place orders were imposed to contain the novel coronavirus.

The company also pointed out that the usage of the Windows Virtual Desktop tripled in the space of just a week. As it turns out, Microsoft's Azure cloud service was reportedly suffering from capacity constraints in Europe earlier in April, forcing the company to create additional capacity in the wake of the pandemic.

However, the cloud isn't the only business arm of Microsoft that could benefit from COVID-19. The software giant's traditional Windows business may also get a boost thanks to an increase in demand for laptops and notebooks. The NPD Group reports that laptop sales were up 10% in the first week of March. Notebook sales to businesses jumped 30% in the closing week of February, followed by a 50% hike in the first half of March.

Microsoft might turn out to be a coronavirus-proof stock, as the crisis has the potential to boost demand for its products. But that's not the only reason why the company seems like a sound bet during these uncertain times.

Microsoft has a solid balance sheet, with its cash position of $134 billion comfortably exceeding its $87 billion in debt obligations. What's more, the stock is currently trading at a price-to-earnings (P/E) ratio of 30 -- lower than the five-year average multiple of nearly 36.

Another thing to like about Microsoft stock is its dividend, which seems to be safe thanks to its impressive cash position, strong free cash flow generation, and a sustainable payout ratio -- all of which strengthen the bull case.

Person pressing a buy button on a keyboard.

Image source: Getty Images.

2. Fortinet's cash-rich balance sheet makes it an attractive bet

Like Microsoft, cybersecurity specialist Fortinet also has a healthy cash position (in this case, $2 billion), and its debt obligations are just $46 million. This puts Fortinet in a solid position to boost shareholder value through stock repurchases in light of the novel coronavirus-induced stock market correction.

The company was left with a share repurchase authorization of $1.6 billion at the end of 2019. It repurchased $141 million worth of shares last year, but there's a good chance of a jump in repurchase activity as the stock is trading at relatively cheap levels.

Fortinet's trailing P/E ratio of 56 is substantially lower than its five-year average multiple of nearly 379. The forward P/E ratio of 40 indicates that the company's bottom line could improve in the future.

Demand for cybersecurity products is reportedly on the rise thanks to social distancing. Companies are taking steps to protect data in a scenario where employees have been working from home. Fortinet has a variety of solutions that companies can deploy to help keep their employees safe from cyber threats. So, there's a possibility that the flight to the telecommuting model in the wake of the coronavirus pandemic could play in Fortinet's favor and help sustain its impressive growth.

Fortinet expects to clock 15% annual revenue growth through 2022, and the COVID-19 outbreak may give it more fuel to achieve that target. That's why it may be a good idea to consider Fortinet stock. It is currently trading at a relatively cheaper valuation, has a strong balance sheet, and could drive bottom-line growth on the back of share repurchases and a potential boost in cybersecurity demand.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool recommends Fortinet and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$246.79 (-0.97%) $-2.41
Fortinet Stock Quote
Fortinet
FTNT
$53.74 (0.28%) $0.15

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