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5 Undervalued Predictable Opportunities in the Tech Sector

These companies have predictable businesses while offering potential value

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Apr 26, 2022
Summary
  • The tech sector as a whole has not performed well so far this year, having tumbled 23.8%.
  • Companies that made the Undervalued Predictable screener include MKS Instruments, SS&C Technologies, Open Text, Fair Isaac and Check Point.
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Continuing the April sell-off, U.S. market indexes were lower on Tuesday morning as tech stocks struggled ahead of releasing earnings reports later in the week.

The Dow Jones Industrial Average shed about 240 points, or 0.9%, while the S&P 500 Index retreated 1.1%. The tech-heavy Nasdaq Composite fell 2.2%.

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The tech sector as a whole has also not performed well so far this year, having tumbled 23.8%.

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As a result, investors may be interested in finding opportunities among undervalued tech securities that have predictable performances.

GuruFocus’ Undervalued Predictable Screener, a Premium feature, determines whether a stock is undervalued or overvalued based on two methods: discounted cash flow and discounted earnings.

According to both methods, companies with a discount higher than zero are consider undervalued, while discounts below zero are considered overvalued. The companies’ predictability rates are then determined based on historical performance over the past decade.

The screener also looks for companies with predictability ranks of at least four out of five stars.

Based on these criteria, a number of tech stocks qualified for the screener as of April 26, including MKS Instruments Inc. (

MKSI, Financial), SS&C Technologies Holdings Inc. (SSNC, Financial), Open Text Corp. (OTEX, Financial), Fair Isaac Corp. (FICO, Financial) and Check Point Software Technologies Ltd. (CHKP, Financial).

MKS Instruments

Shares of MKS Instruments (

MKSI, Financial) are currently trading 64% below its DCF value of $329 and 68% below its discounted earnings value of $376.

The Andover, Massachusetts-based hardware company, which provides instruments, components and systems required in manufacturing products like flat panel displays, medical devices and electronic materials, has a $6.57 billion market cap; its shares were trading around $117.81 on Tuesday with a price-earnings ratio of 11.95, a price-book ratio of 2.29 and a price-sales ratio of 2.25.

The GF Value Line suggests the stock is modestly undervalued currently based on historical ratios, past financial performance and future earnings projections.

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GuruFocus rated MKS Instruments’ financial strength 8 out of 10. In addition to a comfortable level of interest coverage, the high Altman Z-Score of 4.62 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also overshadows the weighted average cost of capital, meaning value is being created as the company grows.

The company’s profitability scored a 9 out of 10 rating, driven by operating margin expansion, strong returns on equity, assets and capital that outperform a majority of competitors and a high Piotroski F-Score of 7 out of 9, indicating conditions are healthy. Due to consistent earnings and revenue growth, MKS Instruments also has a four-star predictability rank. According to GuruFocus, companies with this rank return an average of 9.8% annually over a 10-year period.

Of the gurus invested in MKS Instruments,

Chuck Royce (Trades, Portfolio) has the largest position with 1.52% of outstanding shares. Ken Fisher (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio), Scott Black (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) also own the stock.

SS&C Technologies

SS&C Technologies (

SSNC, Financial) shares are trading 63% below the DCF value of $184 and 40% below its discounted earnings value of $114.

The fintech software company, which is headquartered in Windsor, Connecticut, has a market cap of $17.25 billion; its shares were trading around $67.66 on Tuesday with a price-earnings ratio of 22.6, a price-book ratio of 2.81 and a price-sales ratio of 3.59.

According to the GF Value Line, the stock is fairly valued currently.

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SS&C Technologies’ financial strength was rated 4 out of 10 by GuruFocus. Despite having sufficient interest coverage, the Altman Z-Score of 1.69 warns the company could be at risk of bankruptcy as assets have built up faster than revenue is growing. The WACC also eclipses the ROIC, so the company is struggling to create value.

The company’s profitability fared better, scoring a 10 out of 10 rating on the back of operating margin expansion, strong returns that top over half of its industry peers and a high Piotroski F-Score of 9. Regardless of a slowdown in revenue per share growth, SS&C also has a five-star predictability rank. GuruFocus data shows companies with this rank return, on average, 12.1% annually.

With a 1.5% stake,

Seth Klarman (Trades, Portfolio) is SS&C’s largest guru shareholder. Other top guru investors include Diamond Hill Capital (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Richard Pzena (Trades, Portfolio).

Open Text

Shares of Open Text (

OTEX, Financial) are trading 49% below its DCF value of $79, but 7% above its discounted earnings value of $38.

The Canadian company, which provides enterprise information management software, has a $10.97 billion market cap; its shares were trading around $40.46 on Tuesday with a price-earnings ratio of 22.96, a price-book ratio of 2.62 and a price-sales ratio of 3.26.

Based on the GF Value Line, the stock appears to be modestly undervalued currently.

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GuruFocus rated OpenText’s financial strength 5 out of 10. In addition to insufficient interest coverage, the Altman Z-Score of 2.06 indicates the company is under some pressure since assets are building up at a faster rate than revenue is growing. The ROIC exceeds the WACC, however, so the company is creating value.

The company’s profitability fared better with a 10 out of 10 rating, supported by operating margin expansion, strong returns that top over half its competitors and a moderate Piotroski F-Score of 6, meaning conditions are typical for a stable company. Due to a decline in revenue per share growth over the past year, however, OpenText’s four-star predictability rank is on watch.

Steven Romick (Trades, Portfolio) is the company’s largest guru shareholder with a 0.82% stake. First Pacific Advisors (Trades, Portfolio), Simons’ firm, Ray Dalio (Trades, Portfolio), Greenblatt, Charles Brandes (Trades, Portfolio) and Fisher also have positions in Open Text.

Fair Isaac

Fair Isaac (

FICO, Financial) shares are trading 25% below the DCF value of $494 and 20% below its discounted earnings value of $466.

The data analytics company based in San Jose, California, which focuses on credit scoring services, has a market cap of $9.71 billion; its shares were trading around $370.21 on Tuesday with a price-earnings ratio of 27.19 and a price-sales ratio of 8.

The GF Value Line suggests the stock is modestly undervalued currently.

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Fair Isaac’s financial strength was rated 4 out of 10 by GuruFocus. Although the company has been issuing new long-term debt in recent years, it is at a manageable level due to adequate interest coverage. It also has a robust Altman Z-Score of 7.82. Value is being created since the ROIC surpasses the WACC.

The company’s profitability fared even better with a 10 out of 10 rating, driven by operating margin expansion, strong returns that top a majority of industry peers and a high Piotroski F-Score of 7. Although revenue per share growth has slowed recently, Fair Isaac still has a four-star predictability rank.

Of the gurus invested in Fair Isaac, Baron has the largest holding with 0.56% of its outstanding shares. Among its other top guru shareholders are Fisher,

Steven Cohen (Trades, Portfolio), Royce, Simons’ firm, Jones, Greenblatt and Lee Ainslie (Trades, Portfolio).

Check Point Software Technologies

Shares of Check Point Software Technologies (

CHKP, Financial) are trading 19% below its DCF Value of $169, but 23% above its discounted earnings value of $111.

The cybersecurity company headquartered in Israel, which offers solutions for network, endpoint, cloud and mobile security, in addition to security management, has a $17.58 billion market cap; its shares were trading around $137.23 on Tuesday with a price-earnings ratio of 22.53, a price-book ratio of 5.44 and a price-sales ratio of 8.52.

According to the GF Value Line, the stock is currently fairly valued.

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Check Point’s financial strength and profitability were both rated 10 out of 10 by GuruFocus. In addition to a comfortable level of interest coverage, the Altman Z-Score of 7.8 indicates the company is in good standing. The ROIC is also higher than the WACC, so value is being created.

Although the operating margin is declining, the company is supported by strong returns that top a majority of industry peers and a moderate Piotroski F-Score of 6. Steady earnings and revenue growth contributed to Check Point’s five-star predictability rank.

With 0.38% of its outstanding shares,

John Rogers (Trades, Portfolio) is the company’s largest guru shareholder. Other top guru investors include Simons’ firm, Diamond Hill, Jeremy Grantham (Trades, Portfolio), Jones, Fisher, the iShares MSCI ACWI ex. U.S. ETF and Catherine Wood (Trades, Portfolio).

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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