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Here’s Why You Should Buy These 2 Tech Stocks

Here’s Why You Should Buy These 2 Tech Stocks

Posted On August 27, 2021 1:17 pm
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It’s been a strong year thus far for the major market averages, with the Nasdaq Composite (QQQ) hitting new all-time highs this week, pushing its year-to-date return to more than 16%. While this is great news for investors and has translated to solid returns, this impressive performance has made it quite difficult to add new exposure, given that there are very few names offering a margin of safety after a 110% rally off the March 2020 lows. It’s also made it riskier to add exposure, given that sentiment is through the roof, which often leads to sharp corrections to correct the excess. However, for those looking to build a shopping list, if we do get a correction, a couple of tech names are trading at very reasonable valuations and can be bought on any sharp dips. We’ll look at these two names below:

Chart, line chart Description automatically generated

(Source: TC2000.com)

Hewlett Packard (HPQ) and NortonLifeLock (NLOK) have little in common with one being a hardware company and the other being a cybersecurity software company, but both do share one trait, severely discounted valuations to their peer group. In NLOK’s case, the company trades at just 14x next year’s earnings estimates, while HPQ trades less than 8x this year’s estimates. While neither company is an industry leader by any means, these are very reasonable valuations, baking in a significant margin of safety if we do see further pullbacks. As a bonus, both companies also pay ~2.0% plus annual dividend yields, offering investors additional returns from a total return. Let’s take a closer look below:

Hewlett Packard

Beginning with HPQ, the company just came off a solid quarter, with revenue of $15.9BB, driven by strong double-digit growth in Printing and Personal Systems. The company’s Personal Systems segment saw growth of 28% year-over-year (27% on a constant currency basis), while Personal Systems grew ~25% year-over-year on a constant currency basis. This translated to 27% revenue growth on a consolidated basis, the company’s best quarter for revenue growth in years. The strong growth was broad-based, with the Americas (the US included) up more than 30% year-over-year, EMEA up 25%, and both Asia Pacific and the US up low double-digits. Commercial revenue grew by 34% year-over-year in the Printing segment, but the real growth came from consumers, which was up 77% year-over-year. Notably, the company shared that it had double-digit growth in Instant Ink subscriptions and reached 9.7MM subscribers at quarter-end.

Given the strong first half of FY2021, HPQ has forecasted free cash flow of $4.0BB in FY2021, leaving the stock trading at a double-digit free cash flow yield at an enterprise value of $39BB. Meanwhile, earnings estimates have climbed to $3.51, leaving HPQ trading at just 8.3x this year’s earnings estimates and less than 8x FY2022 earnings estimates of $3.67. While HPQ rarely trades above 15x earnings, the midpoint of its historical multiple is closer to 10, which would translate to a fair value of $36.70 based on FY2022 earnings estimates. This translates to ~26% upside from current levels, with investors also collecting a 2.7% dividend yield. Obviously, high-octane growth names offer much more upside, but with nearly 30% upside to fair value, and what I believe to be less than 10% downside given that the stock should find a floor near $26.00, this is a decent reward/risk ratio.

(Source: YCharts.com, Author’s Chart)

If we look at HPQ’s long-term chart, we can see that the stock recently broke out of a massive 20+ year base and has pulled back towards this base over the past few months. If HPQ could back-test its prior resistance zone near $27.25, this would present what I believe to be an excellent buying opportunity, with less than $2.00 in downside and nearly $10.00 in upside to its fair value of $36.70. So, if we do see some weakness in the upcoming earnings report, I believe this is one name to keep an eye on.

If we look at HPQ’s long-term chart, we can see that the stock recently broke out of a massive 20+ year base and has pulled back towards this base over the past few months. If HPQ could back-test its prior resistance zone near $27.25, this would present what I believe to be an excellent buying opportunity, with less than $2.00 in downside and nearly $10.00 in upside to its fair value of $36.70. So, if we do see some weakness in the upcoming earnings report, I believe this is one name to keep an eye on.

Chart, histogram Description automatically generated

(Source: TC2000.com)

NortonLifeLock

Moving over to NortonLifeLock, the stock just came off a solid report in late July, posting revenue growth of 13% year-over-year and a meaningful increase in operating margins (51.2% vs. 47.1%). This translated to a sharp increase in quarterly earnings per share, which climbed 35% year-over-year to $0.42, beating consensus estimates ($0.40 – $0.41). The company recently launched a new Game Optimizer for gamers, with this maximizing gaming performance while also bolstering security. NLOK noted that the product “frees PCs from power-hungry programs which run in the background that tie up system resources,” with this product offering another avenue of growth for the company. Meanwhile, the company also launched…

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