Warren Buffett deserves much of the credit for the rise in popularity of value investing. Even casual market observers are intimately familiar with the Oracle of Omaha’s investing style and could probably recite the tenets of his strategy from memory. Buffett’s approach to the stock market has also significantly influenced younger value investors such as hedge fund managers David Einhorn and Seth Klarman.
A value investor’s approach is fairly straightforward and simple. They try to identify stocks that are trading below intrinsic value at prices that also provide a “margin of safety.” Value investors are bottom-up stock pickers whose primary focus is on a company’s true worth, and they also tend to have a long-term horizon. For this reason, they are less concerned with macro-economic factors and timing the broader market.
By definition, a stock’s valuation is of utmost importance to market players who adhere to a value approach. In most cases, the cheaper the stock, the better. Of course, the most attractive investments will not only be cheap, but they will also have solid businesses. Below, we examine three inexpensive technology stocks that meet most of the criteria for value investments.
Apple Inc. (NASDAQ:AAPL) – Not only is the Cupertino, CA technology giant a fascinating and unprecedentedly successful company, it may just be the most uniquely valued stock in the history of the stock market. Until very recently, Apple Inc. (NASDAQ:AAPL) was the most highly valued company on the planet. On a market capitalization basis, Apple has been overtaken once again by ExxonMobil amid the steep decline in the former’s share price.
Despite its rich absolute valuation, the stock is also one of the cheapest using a variety of traditional metrics. According to Yahoo! Finance data, Apple trades at a trailing P/E ratio of just under 9, a forward multiple of roughly 8, and a PEG ratio of 0.52. Its price/sales multiple is 2.24, and the stock trades at a lowly Enterprise Value/EBITDA ratio of just over 6. These metrics also do not include the massive pile of cash that the company has on its balance sheet. After backing out Apple’s cash, the shares are currently trading at roughly 5 times next year’s earnings estimates.
This is a shocking figure given that Apple Inc. (NASDAQ:AAPL) is arguably the most innovative company on Earth and has grown its revenue by roughly 265% between fiscal 2009 and 2012. Shares look even cheaper when you throw in the stock’s current dividend yield of around 2.50%. The reasons for Apple Inc. (NASDAQ:AAPL)’s dirt cheap valuation could be debated endlessly, but the pullback from an all-time high of $705 to the current price of under $400 has certainly amplified the phenomenon.
Furthermore, the company may be a victim of its own success. The market is obviously skeptical that Apple will ever be able to release another product that approaches the success of the iPhone and iPad. Another oft-cited concern of investors is falling margins at the company amid increased competition.
Although a number of hedge funds have jumped ship during Apple Inc. (NASDAQ:AAPL)’s decline, one investor who is presumably still betting on the company is famed value investor David Einhorn, the founder of Greenlight Capital. As of the firm’s last 13-F filing it owned approximately 695,000 Apple shares valued at well over $1 billion. Greenlight also owned call options on the stock, and Einhorn recently introduced a proposal which would return more of the company’s cash balance to investors, suggesting that he intends to remain a long-term shareholder.
Intel Corporation (NASDAQ:INTC) – This Santa Clara, CA company is the world’s leading manufacturer of semiconductors and commanded roughly 16% of the market in 2012. At current levels, Intel Corporation (NASDAQ:INTC) sports a market cap of around $110 billion, putting it firmly in the large-cap space. The stock has been largely range-bound for the last decade, with the exception of a move above $30 in late 2003 and early 2004, and a decline into the early teens during the heart of the financial crisis.