Technology

8 Dirt Cheap Technology Stocks at Huge Discounts to the Stock Market

Jon C. Ogg

Published: August 6, 2018 12:05 pm

Last Updated: January 11, 2020 7:50 pm

The nine-year-old bull market has evolved into a choppy market in 2018. Many investors feel that the current valuations are stretched, and some investors feel that the valuations may be unsustainable based on the news flow and valuations ahead. When investors start considering how to value a company and its stock, one of the most classic methods is the price-to-earnings (P/E) ratio. This is just one tool for investors, and it often fails to tell the whole story.

24/7 Wall St. has looked at numerous market sectors to outline where investors may find value in an expensive stock market. While Amazon and Netflix consistently may be valued at more than 100 times earnings, the overall S&P 500 Index and the Dow Jones industrial average are both valued at about 23 times trailing earnings. Those valuations for the coming 12 months and they come with a forward current year P/E of about 16.5 for the Dow and 17.6 for the S&P.

Investors often look for value after periods of big expansion, and it is no secret that growth stocks have by and large outperformed value stocks in recent years. The reason is simple: investors are enthralled growth, and the market’s continued rise just is not the right climate for slower earnings growth (or no growth). If the stock market begins to falter, many investors may prefer to focus on value stocks over the great growth names, now that Netflix, Facebook, Twitter and many other technology leaders have destroyed shareholder valuations in recent weeks.

We have focused our efforts in the technology sector, which also includes the slow-growth/no-growth telecom and IT-services components rather than just software and hardware companies within technology. There were eight companies valued close to or under 10 times expected current year earnings, and none of these companies are small-cap when it comes to their market valuations. A dividend comparison has been made on each, and the relative average dividend yields are almost 2.2% for the Dow and 1.8% for the S&P 500.

Here are eight large-cap and mid-cap technology stocks trading at or under 10 times expected earnings.

AT&T Inc. (NYSE: T) is a well-known telecom and wireless behemoth, but it has been changing its stripes with the acquisition of DirecTV and the more recent purchase of Time Warner. AT&T is valued at about 11 times last year’s earnings, and it is valued at just nine times expected earnings for this year. Its stock performance has suffered, and its 6.3% dividend rarely gets the attention it may deserve for value investors. AT&T has a $233 billion market cap.

DXC Technology Co. (NYSE: DXC) may not be a household name as the company was formed on April 1, 2017. This is the combined entity from the merger of CSC and the Enterprise Services business of Hewlett Packard Enterprise. The company provides IT-services in the United States and abroad, a segment that investors view as old-school and low-value when there are other growth opportunities. That said, its $8 per share in earnings power is expected to be $9 within two years. The current value is barely 10 times expected current-year earnings. DXC’s dividend yield is close to 0.9%, and it has nearly a $25 billion market cap.

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International Business Machines Corp. (NYSE: IBM) may be a behemoth in technology, but the continued reliance on old IT-services and sending Big Blue employees around the country and in international markets has kept a lid on the addition to revenues seen from some of IBM’s strategic imperatives. IBM may screen out with a P/E ratio of 12, but it is valued at just over 10 times expected current year earnings. IBM’s dividend yield is 4.3%, and even with a $113 billion market cap, it has been a dead-money stock for more than five years now.

Lam Research Corp. (NASDAQ: LRCX) has pulled back during the trade war fears targeting technology, and it has become a battleground stock between the bulls and bears as capital spending ambitions and concerns come to a head. Lam Research is valued at just 10 times last year’s earnings and at just under 12 times the currently expected earnings, before earnings growth is expected to resume in 2020. Lam’s dividend is now close to 2.5%, and it has a $30 billion market cap.

Micron Technology Inc. (NASDAQ: MU) is the U.S. leader in DRAM and is now a flash memory leader as well. Micron is valued at just five times expected earnings. Its biggest problem is that investors have treated memory like a commodity, and they never really seem all that willing to pay up for the earnings power. Micron still pays no dividend, but it has a $60 billion market cap.

Seagate Technology PLC (NASDAQ: STX) is in a virtual duopoly with Western Digital when it comes to disk drives, but both companies have expanded greatly into consumer and enterprise offerings. Seagate may be valued at 10 times current earnings, but its forward P/E ratio is just under nine. Seagate now has a dividend yield above 4%, and its market cap is $15 billion.

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Western Digital Corp. (NASDAQ: WDC) is the other half of the virtual duopoly with Seagate for disk drives, but now there are flash drives and flash memory. Investors only have to pay six times forward earnings for this leader, and the worries about its key drive markets have kept its shares cheap during good times and bad times alike. Western Digital has a 2.5% dividend yield and a $20 billion market cap.

Xerox Corp. (NYSE: XRX) is a new company in theory, but its old valuations are harder to match up now that it has split into two companies. The Xerox of today is still focused on copiers and printers, and the business services unit became Conduent. Now Xerox is valued at less than eight times earnings expectations. Investors may wonder how much growth there is here, if any, but they have to pay only about 7.5 times expected earnings for this year and 7.3 times expected earnings for next year. Xerox has a dividend yield of close to 3.8% and a market cap of just under $7 billion.