Along with the entire market, tech stocks have had their share of selloffs this year. To add perspective, the SPDR Technology Sector (XLK) ETF, which tracks the performance of tech stocks, is down 5.3% year-to-date as of the time of writing while the S&P 500 had posted a 6% loss.
The reason for the selloffs going on in the market would depend on whom you ask. But to simplify most responses you’re likely to get, worries about a weak global economy are growing, fueled by ongoing economic issues in China — which matters because it’s the world’s second-largest economy — and the weakness in the oil market.
One thing to know is that large institutional investors like pension mutual funds and hedge funds have mostly triggered the selloffs, perhaps listening to the old market maxim that says cash could be the best position sometimes. There’s nothing inherently wrong with that, as these fund managers have to keep their jobs by not losing money.
But perhaps this was one of the things Warren Buffett noticed when he said, “Be fearful when others are greedy and greedy when others are fearful.”
In other words, the period others are fearful would be a time big fund managers want to play it safe, triggering selloffs when nothing has fundamentally gotten worse with the stocks they own.
I believe we’re in such a period at the moment. And this is one of those few times that true value become available en mass in the modern-day market, where wide coverage and availability of enormous amounts of information makes value scarce. Stocks to buy lurk in various sectors, but here are three bargain tech stocks to consider.
Bargain Tech Stocks: Apple Inc. (AAPL)
After reaching a peak of about $133 a share on Feb. 23, 2015, Apple Inc. (AAPL) lost 20.9% by the end of the year. Even worse, it has lost another 9% of its value year-to-date.
One of the top issues crippling AAPL stock at the moment is a standoff with the Fed over requests to unlock a suspected terrorist’s phone. There has also been the weak iPhone sales, an issue made worse by the struggling economy in China — a country Apple is depending on for growth over the next few years.
But all of these are overblown. With all that is happening right now, I believe the strength of Apple’s cash position is being overlooked. It has arguably the strongest cash position of all tech stocks. Apart from its huge cash stash, its ability to generate cash from ongoing operations is also overlooked.
At the end of the millennium’s first decade, Apple stock’s free cash flow was below that of Microsoft Corporation (MSFT) by about $5.6 billion. However, by the end of 2015, AAPL had $46.6 billion more free cash flow than Microsoft.
Microsoft’s free cash flow has remained relatively flat over this period.
More interesting is the fact that, over this period of great increase in Apple’s free cash flow, the market continues to factor less of its ability to generate cash into its stock price. On the other hand, the market continues to place more value on Microsoft’s free cash flow, which has been relatively flat over this period. The chart below tells the story.
With the issues breathing down AAPL’s neck, the stock could still go lower. However, even at current levels, Apple stock presents a compelling bargain for long-term investors that only few tech stocks can offer.
Bargain Tech Stocks: HP Inc (HPQ)
HP Inc (HPQ) looks like a crazy inclusion, knowing that PC sales were down to 2007 levels by the end of the 2104 fourth quarter. But this shouldn’t blind us from identifying a bargain when one comes around.
Contrary to what the media wants you to believe, the PC is not going away — especially not because of the advent of tablets. For all the (deserved) hype that tablets have enjoyed, I’ve yet to come across any people or businesses with serious computing needs that rely on tablets.
Because, let’s face it, tablets don’t offer the same level of productivity that traditional PCs offer. And the need for optimum productivity cannot be overemphasized. In the actual scheme of things, tablets are only assistants to PCs.
What has been true, though, is that the PC market reached a peak so quickly because of the proliferation of smartphones and tablets, which meant that many people no longer need to invest in PCs for certain simple tasks.
But one thing to note is that the latest decline was not just due to a growing tablet and smartphone market. Economic weakness in China and a strong dollar, which made PCs more expensive in Europe, were huge contributors, according to analysts at IDC.
With analysts predicting that sales should jump in 2016 when business upgrade their computers, there are signs that PCs are already freeing themselves from the tablet/smartphone malaise.
Of course, PC sales won’t grow at historical rates, but signals are that the decline has almost bottomed out. Now, a gradual recovery is on the table. And I believe the market has overreacted to this decline with HP, with the stock down by more than 75% over the last five years, while competitor Lenovo Group Limited (ADR) (LNVGY) has risen by 37% over the same period.
I’m a big fan of cash flow, especially within a struggling market, as it helps us get a better sense of how healthy a company is. In that regard, HPQ is much healthier. HPQ has generated about 15 cents for every dollar of its share price for the trailing-twelve-month period, while Lenovo has lost about 6 cents for every dollar of its share price.
Lenovo’s miserable cash flow performance might be because it’s investing heavily in growth projects. But the difference shows HP is a stronger company, as it’s also investing, yet remaining profitable. If you plan to buy and hold tech stocks for several years, HPQ is definitely a bargain.
Bargain Tech Stocks: Cisco Systems, Inc. (CSCO)
Following the release of its fiscal second-quarter earnings, I analyzed how Cisco Systems, Inc. (CSCO) stock is being undervalued by the market, using certain dividend trends. So it’s a no-brainer to have Cisco stock on this list too.
CSCO stock has fallen by about 11% over the past year, even falling by as much as 24% as of Feb. 10 this year. But even with the rally of late, Cisco is still one of the best tech stocks to buy now.
Beyond the dividend trends I pointed out, its last earnings report also highlighted how Cisco stock continues to lead in its industry. Here are a few things to note.
CEO Chuck Robbins made it clear during the earnings call that, despite competition from companies like VMware, Inc. (VMW) that offer cheaper alternatives, its Application Centric Infrastructure, or ACI, business is growing at a swift rate. Mr. Robbins said its ACI business now has an annual run rate of $2 billion, growing by over 100% in the last quarter. That compares favorably to VMware’s $600 million run rate.
Moreover, CSCO remains a market leader when it comes to the networking hardware business. A VMware exec once said that roughly 75% of VMware’s software-defined networking clients employ Cisco hardware. This is proof Cisco’s hardware is deep-rooted in its market.
One more thing to note: CSCO is also involved in the cloud wars, with the company pushing its cloud Software-as-a-Service business.
All of these make it more attractive — as does its forward price-to-earnings ratio of 11.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned stocks.
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