5 Undervalued Stocks Cooking Up Must-Have Technologies

5 Undervalued Stocks Cooking Up Must-Have Technologies

Posted On July 31, 2020 2:24 pm

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.

A chart showing the total returns of the S&P 500 and the S&P 500 Information Technology index.

Source: Chart by Bloomberg

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.

A chart showing the price-book ratio of the S&P 500 Information Technology Index.

Source: Chart by Bloomberg

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

A chart showing the price-sales ratio of the S&P Information Technology Index.

Source: Chart by Bloomberg

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.

A chart showing the total return of Ericsson (ERIC) since March 2020.

Source: Chart by Bloomberg

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.

A chart showing the total return of Samsung (SSNLF) since March 2020.

Source: Chart by Bloomberg

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…

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