With so many high profile IPOs, scandals and reports of declining or nonexistent profitability, the technology sector may seem overvalued. But experts say there are plenty of great deals out there. They’re just not usually the sexy, social media startups or e-commerce giants.
“The tech sector really isn’t all that expensive when comparing its growth rates to the broader market,” says John Thomas, chief investment officer of Global Wealth Management in Fort Lauderdale, Florida.
Currently the tech sector has a forward price-earnings ratio (P/E), which relates the price an investor is willing to pay to the share price, of 18.7, but an earnings growth rate this quarter of 30 percent, Thomas says. That’s compared to the S&P 500 growth rate of 24 percent and a P/E ratio of 16.5.
[See: 7 Ways to Tell if a Stock Is a Good Price.]
To get the best value in the technology sector, experts advise looking at a company’s growth rate, dividends and P/E ratios. The following companies are a few undervalued ones to watch.
Tencent Holdings (TCEHY). “If there’s a single winner in the technology revolution going on in China right now, that company is Tencent,” says Alexander Lowry, a professor of finance at Gordon College and director of the master of science in financial analysis program. “The key to succeeding in the new China economy is owning the screen time of millions of Chinese. Screen time in China equals a smartphone. And no one owns more screen time than Tencent.”
The company is trading over $14 below its 52-week high, but still up nearly 15 percent in that time frame. It has a forward P/E of 24.67 and dividend yield of 0.21 percent
PagSeguro Digital Ltd (PAGS). Brazil-based PagSeguro offers a full range of online and in-person payment methods that allow companies to conduct their business without a bank account, says J.P. Gravitt, chief marketing strategist and chief executive officer of Market Realist.
“Brazil is home to the largest economy in South America, and while it has been troubled in recent years, PagSeguro has thrived,” he says.
Analysts currently expect the company to post 52.6 percent earnings per share (EPS) growth to 87 cents in 2018, 44.8 percent growth to $1.26 in 2019, and 27.8 percent growth to $1.61 in 2020.
Based on earnings, PagSeguro’s stock trades at just 31.4 times the 2018 estimate, only 21.7 times the 2019 estimate, and a mere 17 times the 2020 estimate, all of which are much too low, Gravitt says.
It’s had a bumpy ride since its IPO this past January, rising to nearly $40 in March before falling to a low of $24.57. It currently has a forward P/E of 23.1 and has yet to pay a dividend.
Long Cognizant Technologies (CTSH). “In the ever-changing world of technology, companies have to stay up to date with the latest or they’ll be left behind,” says Carter Henderson, founder and chief investment officer at Henderson Capital Group. “This is where Cognizant steps in to consult and implement these strategies for companies.”
[See: High Tech Investing: 7 Sectors to Watch.]
The company grew its 2017 revenue by 9.8 percent. This growth is attributable to the integration of digital technologies that are reshaping company business and operating models around the world.
Cognizant is also in the middle of a plan to return $3.4 billion to stockholders through a combination of share repurchases and cash dividends, Henderson says.
Ultra Clean Holdings (UCTT). Ultra Clean is an innovator in semiconductor technology with a current P/E ratio around 7, Henderson says. That’s considerably lower than the industry average of about 23. The company has a return on equity equal to the industry, but their price-to-book value is around 1.23, meaning it is trading just over the assets on the balance sheet.
“Ultra Clean Holdings is seeing tremendous growth in their financial performance,” he says: in 2017, its total revenues reached $924.4 million, up 97 percent from $496.1 million in 2015.
Non-diluted EPS has also seen significant gains, rising 631 percent from 32 cents in 2015 to $2.34 in 2017 — and it’s expected to continue growing.
“With their rapid financial growth, Ultra Clean Holdings has increased their market value by 127 percent since 2015,” Henderson says.
Broadcom (AVGO). Digital semiconductor leader Broadcom has recently fallen out of favor with Wall Street, which makes it a great value buy, says Elijah Lopez, a financial advisor at Manske Wealth Management in Houston, Texas. “While recent mergers and acquisitions activity has worried investors, Broadcom’s expertise in the semiconductor space should continue to fuel the growth that has helped them more than double their profits since 2015.”
[See: 7 of the Best Tech Stocks to Buy for 2018.]
Broadcom’s partnerships with Samsung and Apple ( AAPL) and recent acquisition of CA Technologies ( CA) should boost continued growth, Lopez says. Broadcom’s P/E ratio is low at 8.18. It also pays a regular dividend.
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