The 20 Best Value Stocks in Tech

Study after study has shown that stocks with low price-to-earnings multiples significantly outperform high P/E stocks. Research from my favorite investing guru, NYU professor Aswath Damodaran, found the outperformance to be anywhere from 9% to 12% per year, depending on the study period. That's big money we're talking about.

But you already know you can't just go out and buy the stocks with the lowest multiples. Companies can be trading dirt cheap for a number of reasons, including low growth prospects, skepticism about earnings, and high risk of bankruptcy.

These kinds of stocks can be dangerous, and crater fast. Buy too many of these, and you increase your own risk of bankruptcy!

Thus, for a firm to be truly undervalued, Damodaran says in his book Investment Fables, "You need to get a mismatch: a low price-to-earnings ratio without the stigma of high risk or poor growth."

Of course, you're unlikely to find any high-growth, low-P/E companies out there. But Damodaran suggests setting a reasonable minimum threshold for earnings growth, such as 5%. There are also various ways to minimize risk, including staying away from volatile stocks or companies with dangerous balance sheets.

The screen's the thing
So, our goal today is to find companies with low price-to-earnings multiples, but that also have a relatively low amount of risk and the potential for some growth.

The easiest way to sift for these low-multiple, low-risk nuggets of gold is to set up a screen. Today I'll show you the best value plays in the "information technology" sector, as defined by my Capital IQ screening software.

There are 382 information technology companies on major U.S. exchanges with market caps over $500 million. They have an average forward P/E of 22.4. Here are my parameters:

1. In order to stay away from bankruptcy risk, I used Damodaran's suggestion and only considered companies with total debt less than 60% of capital.
2. In hopes of capturing a reasonable amount of growth, I looked at Capital IQ's long-term estimates and kept only companies expected to grow EPS at 5% annually or better over the next five years. Further, I required at least 5% annualized growth over the past five years.

Of the 83 companies passing the screen, here are the 20 with the lowest forward price-to-earnings multiples:

There are lots of good research candidates here -- I expanded the list to 20 so you could find some companies you were interested in. To further stack the odds on your side, Damodaran says you can eliminate any companies that have restated earnings or had more than two large restructuring charges over the past five years. And if volatile swings in price cause you to lose sleep, consider only companies with betas under 1.

What about companies in difference sectors? I'll be running more screens over the coming days, so be sure to check back in this space!