The stock market has been on a tear since March 23. Together, the Federal Reserve, the Department of Treasury and President Donald Trump have embarked on a path of stabilization. And it’s paying off — we are seeing recovery in the U.S. economy and financial markets. Now, investors should turn to undervalued stocks to find good opportunity.
S&P 500 and S&P Information Technology Total Return
The S&P 500 has returned 46.1% and the harder charging S&P Information Technology Index has returned an even better number of 52.2%.
This now has the S&P 500 just slightly into positive territory for the year at 1.7%. But the technology index is way, way better. It has returned 17.2% in 2020. This is because technology is the alchemy of the economy — taking base materials and turning them into the latest must-have gadgets. Technology is about making something from near nothing.
Investors have always loved technology. It has all of the elements of what can propel stocks. But while this can bring froth into the stock market, it doesn’t always come with value opportunities.
Value is a term that can be defined by nearly any sort of metric. Some companies describe value as what could be. And sometimes companies with negative operating margins and high cash burn can describe themselves as “value” opportunities based on promises of soaring sales. But here, I want to look at opportunities in five truly undervalued stocks in the tech sector.
Not All Tech Stocks Represent More Than Ideas
I love ideas, especially in technology. Every day I spend hours digging through all sorts of news and information well before the early robin begins his worm hunt. But it’s tough to recommend a company if I can’t see actual assets, positive operating margins and a solid credit profile. And then I need to make sure the company is not far above its fair value.
So what I do when get to fully understand a new technological idea is this. I dig through the company and come up with a genuine value for its market opportunity.
The general technology market in the U.S. — as tracked by the S&P Information Technology Index — is a prime example of a lack of value. The index is valuing the members’ price-book ratio at a multiple of 8.9 times.
S&P Information Technology Index Price-Book Ratio
That price-book ratio has been soaring over the past five years by a compound annual growth rate (CAGR) of 16.8%. And yet, the weighted average book value of the members has only been increasing by a compound annual rate of 3.96%. That means that companies aren’t really building their underlying values at anywhere close to the rate. Instead, the stock market is driving up their stock values.
How to Find Real Undervalued Stocks in Tech
S&P Information Technology Index Price-Sales Ratio
And similar over-pricing can be seen in the index members’ value on a price-sales basis. The price-sales ratio is currently running at 5.8 time. And over the trailing five years, that ratio keeps soaring by a compound annual rate of 11%. Again, this is showing that the stock market for technology is way ahead of the realities of the underlying businesses.
But there are undervalued stocks in critical technologies. Plus, these stocks represent actual underlying growth in their businesses.
Here are some that are on the front lines of major technologies that are not just good values – but are market bargains that also pay their shareholders a cut of the actual profits.
- Ericsson (NASDAQ:ERIC)
- Samsung (OTCMKTS:SSNLF)
- Hannon Armstrong (NYSE:HASI)
- Alexandria Real Estate Equities (NYSE:ARE)
- Prologis (NYSE:PLD)
Undervalued Stocks: Ericsson (ERIC)
Ericsson is a very undervalued and underappreciated company. It is one of the primary equipment companies for the rollout and buildout of 5G wireless. In particular, the company has the patents on transmission gear known as massive multiple-input multiple-output (MIMO). 5G is different than previous generations including LTE wireless.
Why? The signals need to be highly concentrated and antennae need to be deployed in a lot more locations — both inside and outside of buildings. LTE uses broad signals that go far and wide, but these signals are limited in data speed and amounts. MIMO uses precisely targeted signals that allow for greater speed and capacity. Think of a water jet rather than a broad spray.
Huawei has some of the MIMO-like gear under questionable — and potentially contestable — patent infringements. And it is not welcome in many markets for various political or economic reasons. Ericsson is getting deals including the recent one with BCE (NYSE:BCE), which is one of my recommended telecom companies.
Ericsson (ERIC) Total Return
Not only do I see this company doing well, I see ERIC stock continuing to drive attention and buying. The shares are valued at only 1.5 times sales and could easily be valued much higher. And add in sales gains and the share price should be much higher. I have raised my “buy under” price to $12 in a taxable account, and I hope to be able to raise it again further. You should buy and own some shares of ERIC.
Samsung Electronics (SSNLF)
Nearly nothing electronic works without chips, processors or components from Samsung Electronics. Open up any Apple (NASDAQ:AAPL) gizmo and you will find Samsung-designed and Samsung-engineered products. And like for Ericsson, 5G won’t be happening without Samsung. And for the latest automotive technologies including autonomous cars, Samsung’s technologies are absolutely go-to necessities.
Unfortunately, too few investors actually own shares in the leading electronic technology companies on the planet. This means that the stock does not reflect the ubiquitous nature of the company’s products — including its own strongly branded goods — from class-leading phones to tablets and televisions.
Samsung Electronics (SSNLF) Total Return
The shares have returned 47.8% since March 23. And for the trailing ten years, the shares have more than tripled in return.
Yet, the shares are valued at only 1.36 times book value and only 1.5 times trailing sales. This makes for a screaming value right now. The stock is a buy under $52.25 in a taxable account. And while it can be harder to buy — including making a phone call to your broker — do it. It will be rewarding.
Undervalued Stocks: Hannon Armstrong (HASI)
The next of my undervalued stocks is Hannon Armstrong, and it represents an interesting market opportunity. Green technology is gaining more and more attention in the markets. And it is a crucial part of ESG investing.
ESG stands for environmental, social and governance. And it is a both a category of companies as well as a scoring mechanism. The basic nature of ESG is that it is a means of investing that will not only provide growth and income, but will be done in a manner that has a better impact on the environment. Additionally, this form of investing focuses on making a positive contribution to society and prioritizing shareholders.
I see it as a profit opportunity. And the market data is proving it or me. The return for the S&P ESG Index has outperformed the general S&P 500, not only over the trailing 12 months by also since the recent bottom on March 23.
S&P ESG and S&P 500 Total Return
Hannon Armstrong is a prime green technology company. It is set up as a real estate investment trust (REIT). But what it really does is finance the development and installation of green technology projects. And it does each of its projects with the backstop of government guarantees, providing an additional level of sustainability for shareholders.
Revenues continue to climb with the trailing five years seeing a compound annual growth rate of 24.8%.
And it pays a tax-advantaged dividend that currently yields 3.9%. It is a big bargain as the shares are valued at only 2.2 times book value. Buy HASI stock under $35.50 in a taxable account.
Alexandria Real Estate Equities (ARE)
Alexandria Real Estate Equities is a REIT based in Pasadena, California. The company is the largest landlord in the U.S. for laboratories and related offices. Its top companies by rent revenues include Amgen (NASDAQ:AMGN), Bristol-Myers Squibb (NYSE:BMY) and Celgene (NASDAQ:CELG).
For the most recent data, Alexandria has seen revenue growth of 15.4% over the past year. And over the past three years, it has grown at a CAGR of 18.9%. Its book value continues to expand by an average of 11.95% over the past three years on a CAGR basis.
Alexandria Revenue and Book Value
The building of book value is quite impressive as it shows that shareholders are not just getting a higher share price, but a higher actual value in the underlying company. And with revenues gaining by an even greater pace, that means that the company is able to make more from its assets at greater margin.
Share-Price Improvement in ARE Stock
But shareholders really care about the shares, of course. And Alexandria continues to be recognized in the market. The return over the trailing year is 21.1% including its dividend income. That’s more than 2.3 times the return of the S&P 500.
Alexandria Real Estate Equities, S&P 500 and S&P Real Estate Total Return
And this outperformance is not just a recent fluke. For over the trailing five years Alexandria has continued to out-gun the S&P 500 and S&P Real Estate Index by nearly similar margins.
But is it too pricey? Nope. The shares are only valued now at 2.3 times book, which is lower than where the shares have been valued over the past years. This is especially impressive given Alexandria’s continued outperformance in the stock market and in the real estate sector.
It is a buy under $177.60 in a taxable account.
Undervalued Stocks: Prologis (PLD)
Prologis is one of the largest warehousing and logistics support companies in the U.S. and around the globe. It has 4,655 buildings amounting to 963 million square feet (MSF) of warehouse and related facilities. Of those, the majority are in the U.S. with 3,302 buildings and 607 MSF. It also has a presence in Asia, specifically in China and Japan.
All of the high-flying online retail and logistics companies absolutely require Prologis’ facilities and services. Do you like Spotify (NYSE:SPOT) or Amazon (NASDAQ:AMZN)? If so, then you should love Prologis.
Prologis continues to perform. Revenue over the trailing year is up by 18.8%. And that includes the highly challenging first and second quarters of this year. And that isn’t just a one-off good year as revenues continue to climb by an average of 17.8% on a CAGR basis for the past trailing five years.
Prologis Revenue and Book Value
Prologis Offers ‘Pro’ Potential
The company runs a profitable ship with low expenditures on general and administrative expenses. And that in turn has driven a return on funds from operations (FFO) — which measures just the profits on the operations of its properties — of 11%.
And the company is not just sitting around. In fact, it continues to expand its assets with eager and confirmed pending tenants. This means that the book value of the company, which is currently sitting at $46.66 per share, is actually increasing. Over the past five years alone the intrinsic value of the company has continued to climb by 10% on average on a CAGR basis.
Prologis, S&P 500 and S&P Real Estate Total Return
The stock also looks like a pro. It has returned 192.5% over the past five years, which is way above the S&P 500’s return of 71.2% and the S&P Real Estate Index’s return of 35%.
But the stock is still perfect for this list of undervalued stocks. It is valued at 2.3% of its book value. This is way cheaper than the average for the members of the S&P Real Estate Index.
It is a buy ideally under $104.90 in a taxable account.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.