2 Undervalued Tech Stocks To Buy Now

The technology industry is a vast landscape of fluctuations and innovations that make it hard to keep up.

Read on for details and why Cisco and Intel should be your prime target right now.

We will start out with the criteria for how we judged it, and show you how these two stocks fared better than the rest.  

The criteria

For judging which stock is a safe bet and undervalued, there are several thresholds applied to the industry to determine which make the cut in our analysis.

• Firstly, the business must be generating at least $40 billion in annual sales on a 12-month trailing basis: might seem like a lot, but to the tech giants of today this is the bare minimum to be called one of the big boys
• The net income of the company needs to be at least $10 billion, again on a 12-month basis
• Debt must be less than 20% of its market value
• The stock needs a price-to-earnings growth ratio lower than 1.5

These are integral, but there are three more criteria that make up our 7-point basis for which stocks are currently undervalued:

• Return on assets is above 5%, and the return on equity is above or equal to 15%
• The three-year average cash flow of the company is $10 billion or higher
• Lastly, the yield must be about 50% while the payout ratio should be less than this figure

The contenders and winners

The above graph shows Cisco’s price levels over the last three-quarters.

With a strong cash flow, a great balance sheet, and positive earnings prospects, Cisco and Intel are both very safe bets.

One can expect to see market-beating steady growth from both.

See below for Intel’s positioning:

From each industry, we will go through the possible contenders, and then apply the rules to show how we concluded with our two winners.

From the tech hardware behemoths, Apple and IBM are possible winners, taking into account the first two rules regarding sales and net income.

In computer networking, the only company that comes close is Cisco Systems.

The internet services and social media group sees only Google (though its parent company Alphabet) make the cut.

Facebook is out as it doesn’t have the $40 billion in sales, while Amazon has more than adequate sales (a whopping $110 billion) but its net income figures aren’t high enough to meet the second criteria of $10 billion.

Last but far from least, the semiconductor industry provides us with only the one name, Intel, while programming sees the king stay the king, with Microsoft being the only contender.

So we start with six possible contenders for the prize, and what follows is how the two mentioned previously came out on top.

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Now, let’s apply send in the lions (rule 3) and see who is still alive in the Colosseum

The third rule was regarding debt-to-market capitalization, stating that debt could not be equal to more than 20% of the company’s market value.

Apple makes the cut, but IBM does not.

This is because IBM has over $45 million worth of debt, while its market value is around $153 billion.

–    153 divided by 45 is about 0.29, meaning its debt represents around 30% of the market share

Let’s see the debt to enterprise values of the remaining companies:

–    Google (Alphabet): 1%

–    Microsoft: 12%

–    Cisco: 13%

–    Intel: 13%

–    Apple: 9%

The fourth rule, if you remember correctly, was that the PEG, the price-earnings-growth ratio had to be less than 1.5.

The following numbers are the five-year predicted ratios, which helps us to determine the trade-off between the stock price, the earnings per share and the company’s forecasted 5-year growth.

–    Cisco Systems: 1.23

–    Google (Alphabet): 1.3

–    Apple: 1.3

–    Intel: 1.46 (just, that was a close one)

–    Microsoft: 2.3

As you can see Microsoft’s price-earnings-growth ratio is a little too high for our list, and thus the industry leader falls out of the running.

We are now left with Cisco, Google, Apple, and Intel.

Now on to returns and cash flow

So we move on to the 5th rule, which was regarding return on assets and return on equity.

The two had to be above 5% and 15% respectively.

Google (Alphabet) is out of the running because it has figures of 8.9% and 15% for ROA and ROE respectively.

It made the cut for the return on assets figure but was just below that needed for a return on equity.

Sorry Google.

The three remaining tech stock candidates are Apple, Cisco, and Intel.

The sixth rule for the prize was that the company had to have a three-year average cash flow of more than $10 billion.

• Apple had a cash flow of $53 billion, $59 billion, and $81 billion in 2013, 2014, and 2015 respectively
• Intel’s figures were $21 billion, $20 billion and $19 billion in those same years
• Cisco’s was around $12-13 billion in that same period

So all three passed the sixth test with flying colors.

Dividends, lovely dividends, and the final word

The final rule is about dividends.

The 3% figure is chosen because the investor will receive a steady return even if the stock sees a weak performance at this number.

Similarly, the payout ratio being less than 50% means the dividends are safe.

Apple passes the test for the latter figure, but its yield is only 2.28%.

Meanwhile Cisco and Intel have 3.39% and 2.96% returns respectively.

We’ll let those four percentage points slide for Intel.

These two also have payout ratios below 50%, making them the only stocks to match all seven criteria introduced in the beginning.

So to conclude, Cisco and Intel remain our stocks to buy, being undervalued currently and representing double-digit earnings growth while also maintaining very safe dividends for investors.

We are left with a networking giant and the king of semiconductor chips.

Not bad.

Get in on the action before the rest of the rabble catch on.