5 Undervalued Predictable Tech Stocks to Consider

These companies have predictable businesses while offering potential value

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Oct 25, 2022
Summary
  • The Nasdaq Composite was up on Tuesday morning ahead of major tech earnings reports.
  • The tech sector was also up for the day.
  • These companies are undervalued based on a DCF model.
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As investors await earnings reports from major tech companies like Alphabet Inc. (

GOOG, Financial)(GOOGL, Financial) and Microsoft Corp. (MSFT, Financial) later today, the Nasdaq Composite was up on Tuesday morning.

The tech-heavy index rose 1.5%, while the S&P 500 gained 0.8%. The Dow Jones Industrial Average added only 200 points, or 0.6%.

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While the tech sector as a whole has not performed well so far this year, having tumbled 39.05%, it climbed more than 3% on Tuesday.

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

The Undervalued Predictable Screener, a Premium GuruFocus 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 their 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 Oct. 25, including SS&C Technologies Holdings Inc. (

SSNC, Financial), MKS Instruments Inc. (MKSI, Financial), Lam Research Corp. (LRCX, Financial), Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) and United Microelectronics Corp. (UMC, Financial).

SS&C Technologies

Shares of SS&C Technologies (

SSNC, Financial) are currently trading 64% below the DCF value of $135 and 41% below the discounted earnings value of $84.

The Windsor, Connecticut-based fintech software company has a $12.58 billion market cap; its shares were trading around $49.34 on Tuesday with a price-earnings ratio of 18.34, a price-book ratio of 2.08 and a price-sales ratio of 2.54.

The GF Value Line suggests the stock, while undervalued, is a possible value trap currently based on historical ratios, past financial performance and future earnings projections. As such, potential investors should conduct thorough research before making a decision.

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The GF Score of 96 out of 100 indicates the company has high outperformance potential going forward. While it received high ranks for profitability, growth, GF Value and momentum, financial strength only got middling marks.

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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 1.38 warns the company could be at risk of bankruptcy as assets have built up faster than revenue is growing. The weighted average cost of capital also overshadows the return on invested capital, meaning the company is struggling to create value as it grows.

The company’s profitability fared better, scoring a 10 out of 10 rating on the back of operating margin expansion, strong returns on equity, assets and capital that top over half of its competitors and a moderate Piotroski F-Score of 6 out of 9, indicating conditions are typical for a stable company. Due to a slowdown in revenue per share growth, SS&C’s five-star predictability rank is on watch. According to GuruFocus research, companies with this rank return an average of 12.1% annually over a 10-year period.

Of the gurus invested in SS&C Technologies,

Richard Pzena (Trades, Portfolio) has the largest stake with 3.50% of its outstanding shares. Diamond Hill Capital (Trades, Portfolio), Seth Klarman (Trades, Portfolio) and Ron Baron (Trades, Portfolio) also have sizeable holdings.

MKS Instruments

MKS Instruments (

MKSI, Financial) shares are trading 55% below the DCF value of $180 and 74% below the discounted earnings value of $311.

The hardware company headquartered in Andover, Massachusetts, which provides instruments, components and systems required in manufacturing products like flat panel displays, medical devices and electronic materials, has a market cap of $5.38 billion; its shares were trading around $80.90 on Tuesday with a price-earnings ratio of 8.12, a price-book ratio of 1.44 and a price-sales ratio of 1.50.

According to the GF Value Line, the stock is significantly undervalued currently.

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The GF Score of 93 suggests the company has high outperformance potential. It raked in high points for profitability growth, financial strength and momentum as well as middling marks for GF Value.

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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 4.20 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC also eclipses the WACC, so 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 that outperform a majority of industry peers and a moderate Piotroski F-Score of 5. Due to consistent earnings and revenue growth, MKS Instruments also has a four-star predictability rank. GuruFocus found companies with this rank return an average of 9.8% annually.

With 1.42% of outstanding shares,

Chuck Royce (Trades, Portfolio) is MKS Instruments’ largest guru shareholder. Other guru investors include Ken Fisher (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).

Lam Research

Shares of Lam Research (

LRCX, Financial) are trading 48% below the DCF value of $735 and 65% below the discounted earnings value of $1,090.

The Fremont, California-based manufacturer of semiconductor fabrication equipment has a $51.58 billion market cap; its shares were trading around $378.22 on Tuesday with a price-earnings ratio of 10.85, a price-book ratio of 6.96 and a price-sales ratio of 2.93.

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

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Further, the GF Score of 98 indicates the company has high outperformance potential. It raked in high marks across the board.

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Lam Research’s financial strength was rated 7 out of 10 by GuruFocus. On top of sufficient interest coverage, the Altman Z-Score of 5.21 indicates the company is in good standing. The ROIC also exceeds the ROIC, so value creation is occurring.

The company’s profitability fared even better with a 10 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. As a result of steady earnings and revenue growth, Lam Research has a 4.5-star predictability rank. GuruFocus data shows companies with this rank return, on average, 10.6% annually.

Fisher is the company’s largest guru shareholder with a 1.45% stake.

Frank Sands (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, Greenblatt and Mark Hillman (Trades, Portfolio) also have notable positions.

Taiwan Semiconductor Manufacturing

Taiwan Semiconductor Manufacturing (

TSM, Financial) shares are trading 36% below the DCF value of $95 and 45% below the discounted earnings value of $112.

The Taiwanese manufacturer of semiconductor chips has a market cap of $316.92 billion; its shares were trading around $61.11 on Tuesday with a price-earnings ratio of 13.13, a price-book ratio of 4 and a price-sales ratio of 5.32.

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

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The company has high outperformance potential based on its GF Score of 97. It recorded strong ranks across the board, though momentum was moderate at 5 out of 10.

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GuruFocus rated Taiwan Semiconductor’s financial strength 8 out of 10. Although the company has issued new long-term debt over the past three years, it is manageable due to an adequate level of interest coverage. The robust Altman Z-Score of 5.25 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing. The ROIC also outshines the WACC, so value is being created.

The company’s profitability scored a 10 out of 10 rating on the back of an expanding operating margin, strong returns that top a majority of industry peers and a high Piotroski F-Score of 8, meaning operations are healthy. Taiwan Semiconductor’s consistent revenue per share growth contributed to a four-star predictability rank.

Of the gurus invested in the company, Fisher has the largest stake with 0.51% of its outstanding shares. Sands,

First Eagle Investment (Trades, Portfolio), Steve Mandel (Trades, Portfolio), Baillie Gifford (Trades, Portfolio), Ruane Cunniff (Trades, Portfolio), Baron, Sarah Ketterer (Trades, Portfolio) and Grantham also have large holdings in Taiwan Semiconductor.

United Microelectronics

Shares of United Microelectronics (

UMC, Financial) are trading 31% below its DCF Value of $9 and 63% below its discounted earnings value of $17.

The Taiwanese semiconductor manufacturer has a $15.64 billion market cap; its shares were trading around $6.27 on Tuesday with a price-earnings ratio of 7.07, a price-book ratio of 1.77 and a price-sales ratio of 1.97.

According to the GF Value Line, the stock is modestly undervalued currently.

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The company has high outperformance potential based on its GF Score of 93. It received high ratings for everything but momentum, which received a middling mark of 5.

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United Microelectronics’ financial strength and profitability were both rated 8 out of 10 by GuruFocus. In addition to a comfortable level of interest coverage, the company’s Altman Z-Score of 3.11 indicates it is in good standing. The ROIC also surpasses the WACC, so value creation is occurring.

The company is supported by operating margin expansion, strong returns that top a majority of competitors and a high Piotroski F-Score of 7. Steady revenue and earnings growth contributed to United Microelectronics’ four-star predictability rank.

With 0.13% of its outstanding shares, Simons’ firm is United Microelectronics’ largest guru shareholder. Fisher and Ketterer also own the stock.

Additional opportunities

Other companies that qualified for the screener were Check Point Software Technologies Ltd. (

CHKP, Financial), Fair Isaac Corp. (FICO, Financial), Apple Inc. (AAPL, Financial), Texas Instruments Inc. (TXN, Financial), Amkor Technology Inc. (AMKR, Financial), Wipro Ltd. (WIT, Financial), Flex Ltd. (FLEX, Financial) and Entegris Inc. (ENTG, Financial).

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Disclosures

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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