Top Five Value Tech Stocks on the Market (Part One)

“What kind of investor are you: growth or value?”

I’ve always found this to be quite the perplexing question — maybe even a bit naive. After all, it relies on the assumption that growth and value are mutually exclusive when, in fact, they’re intrinsically entwined.

The reality of the classic “growth vs. value” debate is that growth is simply an inherent component of value. We just happen to be inclined to separate the two because one is easier to put a number on than the other.

In today’s business environment, companies can rise and fall in the relative blink of an eye. Thanks to rapid technological disruption, growth has become more synonymous with value than perhaps even the most classic value metrics themselves.

All you need to do is look at rising price-to-earnings ratios to realize this statement is true. The market has had absolutely no qualms lately in valuing relatively large technology firms at triple-digit P/Es. The reason for this is that technology is causing companies to grow at rates faster than ever before and presumably will continue to do so for the foreseeable future.

Now, to be clear, none of this is to say value metrics are no longer relevant or meaningful — they still are and always will be incredibly important pieces of information to consider before buying a stock. In fact, if you’re not paying attention to value metrics, you probably shouldn’t be investing at all.

The key to using value metrics in a high-growth market is considering how significant that growth actually is.

Some of the pricing on today’s stocks might seem insane, but it all depends on the situation at hand. The growth potential of small, development-stage biotechs, for instance, is often enough to justify an undefined P/E, while the growth potential of an already massive company like Wal-Mart is simply not.

Nonetheless, it would be a costly mistake to allocate your entire portfolio under the assumption that implied growth naturally justifies sky-high valuations. You ultimately need a mix of stocks that are reasonably priced on a future basis and others that are reasonably priced on a trailing basis.

For these reasons, the division between growth and value, while misleading, can still be useful to consider. Ultimately, there’s just one question you have to ask yourself: How much am I investing in the future, and how much am I investing in the here and now?

As is usually the case with asset allocation, there is no universal answer to that question. The proper ratio of growth to value stocks in your portfolio will depend on a variety of factors including age, income, tolerance for risk, and so forth.

As a general rule of thumb, though, it’s recommended that you allocate value-to-growth at somewhere around a 60/40 split.

Here at Tech Investing Daily, we focus primarily on companies that fall into the latter category. After all, technology stocks tend to lend themselves towards future growth.

However, there are still a fair number of stocks in this sector that remain reasonably priced in terms of trailing metrics, which is why we’ll now be sharing our top five value tech stocks on the market.

Value Tech Stock #1: Apple Inc. (NASDAQ: AAPL)

We’ll start with the most obvious of contenders: Apple Inc., the reigning heavyweight champ of the technology sector and the broader market.

It’s hard to believe today, but when Apple first went public back in 1980, Massachusetts legislators deemed the stock “too risky” for state residents. It was the definition of a growth stock at the time, but in hindsight it was also one of enormous value.

In case you missed it, Apple recently became the single biggest company in the world. It now sports a market cap of $722 billion and boasts over $200 million in sales on an annual basis thanks primarily to the wild success of a single product line: the iPhone.

When it comes to value, Apple has the works: beefy profit margins (22.5%), plenty of cash to work with ($38 billion), minimal debt, and a history of relentless top- and bottom-line growth. Not only is Apple raking in more money than any other company out there, but it’s still growing revenue at a pace of 32%.

At a price-to-earnings ratio of 15.72 and a PEG of just 1.04, Apple is priced below any other tech behemoth on the market, including Google and Microsoft. At the same time, the company scores better on total income, profit margins, and growth. Paying less for more — that’s the definition of value.

Investors can be confident Apple isn’t going anywhere anytime soon. When you make high-quality, user-friendly products for years on end, you build brand loyalty more than anything.

Recognition of the Apple brand is stronger than any other company in the world, and if we’ve learned anything from Buffett’s investments in Coca-Cola back in the late ’80s, we know how valuable that recognition actually is.

Even as it flirts with all-time highs, Apple remains one of the best value plays on the market.

Value Tech Stock #2: Micron Technology Inc. (NASDAQ: MU)

Micron Technology manufactures semiconductors for the electronics industry. Specifically, the company produces DRAM (dynamic random access memory) and NAND/NOR flash memory chips.

Since the start of 2015, Micron has seen major selling pressure due to falling DRAM pricing and a general lack of confidence in the PC market. Year to date, the stock is down 46%, with a large chunk of that depreciation being the result of negative earnings revisions in the company’s most recent conference call.

Yet despite recent headwinds, Micron’s profitability remains unthreatened. The company still boasts strong profit margins at 21.27% with relatively flat revenue growth. And recent data from Gartner suggests the PC market is stabilizing. In fact, Gartner expects a small 1% growth in the PC market by year-end.

At a P/E of just 6.24, Micron is without a doubt one of the lowest-valued tech stocks on the market, not to mention the semiconductor industry. Along with a PEG at 0.56, the recent sell-off represents a major discount, especially considering the fact that the memory market is largely cyclical by nature.

The reality is DRAM works like a commodity. When prices are high, Micron makes more chips to milk a profit. As Micron makes more chips, DRAM prices begin to decrease. When prices decrease, Micron cuts back production in order for prices to rebound.

Right now, Micron is simply at the low point of that cycle. Not too long ago, the company was in a similar position. In 2012, DRAM pricing pressure pushed margins down to 10% (down from 31% in 2011), and shares plummeted to near a 10-year low.

By the start of 2014, though, pricing woes had disappeared, and margins were back over 30%, just as they were in 2011. Micron stock jointly took off and climbed nearly 500% in a three-year time frame.

Chances that Micron will appreciate in value by 500% once again are probably slim, but so is the possibility of grabbing a stake in the company much cheaper than where it’s priced today.

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Part two is out now “Top Five Value Tech Stocks on the Market.”

Until next time,

Jason Stutman

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