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Sydnee Gatewood
Sydnee Gatewood
Articles (2957) 

4 Software Stocks Trading Below the GF Value Line

These companies are modestly undervalued based on a number of metrics

As technology stocks weighed on the market on Thursday morning, bringing the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite down over 1% each, investors may be looking to take advantage of the dip.

Using the GuruFocus Fair Value Line, a new unique method of estimating the intrinsic value of a stock, investors can find potential value opportunities. Based on the popular Peter Lynch value line, which compares a stock's current price to how much its earnings per share would be worth if it traded at a price-earnings ratio of 15, the GF Value Line takes more than price into account when determining value. It also considers a company's historical price-earnings, price-book, price-sales and price-to-free cash flow ratios, an adjustment factor based on past returns and growth as well as future estimates of the business' performance.

Using the GF Value Line for Intel Corp. (NASDAQ:INTC) as an example, we can see that the stock is considered to be modestly undervalued. The share price is represented by the blue line, while the solid black line shows the past intrinsic values calculated by the GF Value Line. The dotted portion of the black line illustrates the estimates of future intrinsic value. The red and green bands delineate overvaluation and undervaluation, respectively, with the darker shades indicating more severe deviations from the intrinsic valuation.

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As of Sept. 17, the GuruFocus All-in-One Screener, a Premium feature, found software companies that were modestly undervalued, had a price-to-GF value between 0.4 and 0.8 and a predictability rank of at least two out of five stars included The Hackett Group Inc. (NASDAQ:HCKT), VMware Inc. (NYSE:VMW), F5 Networks Inc. (NASDAQ:FFIV) and CSG Systems International Inc. (NASDAQ:CSGS).

Hackett Group

Hackett Group has a $370.64 million market cap; its shares were trading around $12.37 on Thursday with a price-earnings ratio of 38.53, a price-book ratio of 2.71 and a price-sales ratio of 1.49.

Based on a GF Value of $15.42 and a price-to-GF Value ratio of 0.8, the stock appears to be modestly undervalued.

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The GuruFocus valuation rank of 6 out of 10 also points to undervaluation.

GuruFocus rated the Miami-based information technology service management company's financial strength 9 out of 10 on the back of comfortable interest coverage and a high Altman Z-Score of 5.7.

Hackett's profitability scored a 7 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6, which suggests business conditions are stable. The company's two-star predictability rank is on watch, however, as a result of declining revenue per share over the past 12 months. According to GuruFocus, companies with this rank typically return an average of 6% annually over a 10-year period.

Of the gurus invested in Hackett Group, Jim Simons (Trades, Portfolio)' Renaissance Technologies has the largest stake with 4.78% of outstanding shares. Other top guru shareholders are Chuck Royce (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).

VMware

VMware has a market cap of $59.76 billion; its shares were trading around $141.30 on Thursday with a price-earnings ratio of 33.55, a price-book ratio of 7.56 and a price-sales ratio of 5.21.

With a GF Value of $184.79 and a price-to-GF Value ratio of 0.77, the stock appears to be modestly undervalued.

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The GuruFocus valuation rank of 7 out of 10 also leans toward undervaluation.

VMware's financial strength was rated 5 out of 10 by GuruFocus. Although it has adequate interest coverage, the Altman Z-Score of 2.69 indicates the company is under some stress since its assets are building up at a faster rate than revenue is growing.

The company's profitability fared better, scoring a 9 out of 10 rating even though the operating margin is in decline. VMware is also supported by returns outperforming a majority of industry peers, a moderate Piotroski F-Score of 6 and consistent earnings and revenue growth. It also has a four-star predictability rank. GuruFocus says companies with this rank return an average of 9.8% annually.

With a 1.46% stake, Dodge & Cox is the company's largest guru shareholder. PRIMECAP Management (Trades, Portfolio), Simons' firm, Pioneer, Chris Davis (Trades, Portfolio), Ken Fisher (Trades, Portfolio), John Hussman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also own the stock.

F5 Networks

F5 Networks has a $7.57 billion market cap; its shares were trading around $123.71 on Thursday with a price-earnings ratio of 23.22, a price-book ratio of 3.53 and a price-sales ratio of 3.26.

Trading with a GF Value of $154.78 and a price-to-GF Value ratio of 0.8, the stock appears to be modestly undervalued.

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The GuruFocus valuation rank of 9 out of 10 also supports the stock being undervalued.

GuruFocus rated VMware's financial strength 6 out of 10. In addition to a good cash-debt ratio of 1.9, the company has a high Altman Z-Score of 3.36.

The company's profitability scored a 9 out of 10 rating. Although the operating margin is in decline, VMware has strong returns that outperform a majority of competitors. It also has a low Piotroski F-Score of 3, which suggests business conditions are in poor shape, and the three-star predictability rank is on watch as a result of declining earnings and revenue. GuruFocus data shows companies with this rank typically return an average of 8.2% per year.

Simons' firm has the largest stake in VMware with 5.13% of outstanding shares. Pioneer, Greenblatt, Hussman and Charles Brandes (Trades, Portfolio) also own the stock.

CSG Systems International

CSG Systems has a market cap of $1.31 billion; its shares were trading around $39.51 on Thursday with a price-earnings ratio of 16.89, a price-book ratio of 3.28 and a price-sales ratio of 1.29.

Based on a GF Value of $51.39 and a price-to-GF Value ratio of 0.76, the stock appears to be modestly undervalued.

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The GuruFocus valuation rank of 7 out of 10 also suggests it is undervalued.

CSG Systems' financial strength was rated 5 out of 10 by GuruFocus on the back of a strong Altman Z-Score of 3.19, though assets are building up faster than revenue is growing.

The company's profitability scored an 8 out of 10 rating, driven by strong margins and returns that outperform a majority of industry peers. CSG also has a moderate Piotroski F-Score of 6, but the four-star predictability rank is on watch even though it has recorded steady earnings and revenue growth.

With a 6.29% stake, Simons' firm is the company's largest guru shareholder. Other top guru investors are Grantham, Hussman, Pioneer, Royce and Jones.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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