Tech stocks have performed the strongest during the novel coronavirus pandemic. Markets continue to be appreciative of the products and services produced by these companies. Trends including digital transformation and external forces such office closings are contributing to this.
Markets are certainly appreciative of tech stocks in general. Investors have rewarded tech stocks richly during, and prior to the pandemic. Yet, there are gems that remain hidden within the sector.
Traditional analysis of underappreciated stocks focuses on the often cited trailing price-to-earnings ratio. Tech, however, is often the domain of valuations seemingly unwed from fundamentals, and earnings may be non-existent in some cases. Today, I’ll be looking at:
Investors seeking deals often look to sales ratios to find the undervalued and underappreciated stocks within the sector. This article looks at valuation indicators along with other factors indicative of a given stock being underappreciated.
CACI International (CACI)
CACI International provides Government IT Services. Investors who may never have heard of CACI should give the shares a look. Tech investors should have plenty of reason to believe in this stock. One reason markets tend to under-appreciate a stock like CACI is because it is neither sexy nor in the headlines. Investors might shy away for that reason alone.
Analysts have CACI shares rated as a “buy.” The stock is sitting at around $198 and the average analyst price target is around $290. Investors may consider that reason enough to buy as such price appreciation would amount to a 46% increase.
Analyst price targets are of course forward-looking projections, and no guarantee of actual appreciation. However, CACI’s price-to-sales ratio is also a low 0.9. Markets may soon appreciate this lesser known stock, and now is the time to jump in. The company has shown consistent growth in revenue per share and boasts an increasing operating margin.
Leidos Holdings, Inc. (LDOS)
Leidos is another IT provider in the Government and Defense space. Shares currently trade around $88, with analyst consensus being they will rise above $100 within a year. The company has a reasonably low P/S ratio of 1.12 and its operating margin is expanding.
For investors considering either CACI or Leidos, it may be prudent to look at EPS in deciding one over the other. CACI International’s EPS was $10.89 while Leidos’ sat at $4.10. CACI looks to be better on that front. It also seems to be the steadier firm. Nevertheless, both are worth a strong look.
According to The Wall Street Journal Leidos’ shares are overweight, so the company does look to be very possibly appreciating.
Ciena shares are poised to potentially benefit from the sanctions against Huawei. Many countries are considering imposing sanctions and outright bans against the use of Huawei products within their respective countries. As they do so, the door for players like Ciena swings open.
Ciena is an optical network infrastructure firm positioned to benefit from the geopolitical environment surrounding Chinese companies. It has already risen appreciably in price, yet there is gas left in the tank.
Sanctions and bans give Ciena a nearly unfair advantage of which they will capitalize upon. Ciena isn’t a well-known name, but should be gaining prominence and is worth serious investor consideration. While Ciena isn’t undervalued per se, it is underappreciated in the sense that an opportune situation exists for it. Investors simply may not know much about the company and thus under-appreciate it.
Amdocs is a Missouri software and services solutions company in the communications, entertainment, and media industry. The company has recently inked an international deal with Philippines-based PLDT (NYSE:PHI) as part of its digital transformation push. PLDT is a leading telecom provider in the nation. Amdocs is also working with Cellcom Israel (NYSE:CEL) in undertaking digitization efforts.
The company has shown consistent growth in its revenue per share and had a recent EPS of $3.65. Amdocs has shown financial strength and profitability. The firm’s trailing P/E ratio and forward P/E ratio rank better than 70% and 90% of industry competitors.
Investors aren’t paying a lot for a piece of DOX sales currently, but this could very well change. As a lesser-known name, Amdocs should pique investor interest with its potential.
As of this writing, Alex Sirois did not own shares in any of the aforementioned stocks.