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:

Company

P/E Multiple*

Long-Term EPS Growth Estimate

Oracle (NYSE: ORCL)

12.5

13.3%

Hewlett-Packard (NYSE: HPQ)

9.4

11.8%

Intel (Nasdaq: INTC)

10.4

10.8%

Cisco Systems (Nasdaq: CSCO)

12.8

11.6%

Microsoft (Nasdaq: MSFT)

11.2

11.5%

*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.