Here’s Why You Should Buy These 2 Tech Stocks

It’s been a strong year thus far for the major market averages, with the Nasdaq Composite (QQQ) hitting new all-time highs this week, pushing its year-to-date return to more than 16%. While this is great news for investors and has translated to solid returns, this impressive performance has made it quite difficult to add new exposure, given that there are very few names offering a margin of safety after a 110% rally off the March 2020 lows. It’s also made it riskier to add exposure, given that sentiment is through the roof, which often leads to sharp corrections to correct the excess. However, for those looking to build a shopping list, if we do get a correction, a couple of tech names are trading at very reasonable valuations and can be bought on any sharp dips. We’ll look at these two names below:

(Source: TC2000.com)

Hewlett Packard (HPQ) and NortonLifeLock (NLOK) have little in common with one being a hardware company and the other being a cybersecurity software company, but both do share one trait, severely discounted valuations to their peer group. In NLOK’s case, the company trades at just 14x next year’s earnings estimates, while HPQ trades less than 8x this year’s estimates. While neither company is an industry leader by any means, these are very reasonable valuations, baking in a significant margin of safety if we do see further pullbacks. As a bonus, both companies also pay ~2.0% plus annual dividend yields, offering investors additional returns from a total return. Let’s take a closer look below:

Beginning with HPQ, the company just came off a solid quarter, with revenue of $15.9BB, driven by strong double-digit growth in Printing and Personal Systems. The company’s Personal Systems segment saw growth of 28% year-over-year (27% on a constant currency basis), while Personal Systems grew ~25% year-over-year on a constant currency basis. This translated to 27% revenue growth on a consolidated basis, the company’s best quarter for revenue growth in years. The strong growth was broad-based, with the Americas (the US included) up more than 30% year-over-year, EMEA up 25%, and both Asia Pacific and the US up low double-digits. Commercial revenue grew by 34% year-over-year in the Printing segment, but the real growth came from consumers, which was up 77% year-over-year. Notably, the company shared that it had double-digit growth in Instant Ink subscriptions and reached 9.7MM subscribers at quarter-end.

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Given the strong first half of FY2021, HPQ has forecasted free cash flow of $4.0BB in FY2021, leaving the stock trading at a double-digit free cash flow yield at an enterprise value of $39BB. Meanwhile, earnings estimates have climbed to $3.51, leaving HPQ trading at just 8.3x this year’s earnings estimates and less than 8x FY2022 earnings estimates of $3.67. While HPQ rarely trades above 15x earnings, the midpoint of its historical multiple is closer to 10, which would translate to a fair value of $36.70 based on FY2022 earnings estimates. This translates to ~26% upside from current levels, with investors also collecting a 2.7% dividend yield. Obviously, high-octane growth names offer much more upside, but with nearly 30% upside to fair value, and what I believe to be less than 10% downside given that the stock should find a floor near $26.00, this is a decent reward/risk ratio.

(Source: YCharts.com, Author’s Chart)

If we look at HPQ’s long-term chart, we can see that the stock recently broke out of a massive 20+ year base and has pulled back towards this base over the past few months. If HPQ could back-test its prior resistance zone near $27.25, this would present what I believe to be an excellent buying opportunity, with less than $2.00 in downside and nearly $10.00 in upside to its fair value of $36.70. So, if we do see some weakness in the upcoming earnings report, I believe this is one name to keep an eye on.

Chart, histogram Description automatically generated

(Source: TC2000.com)

Moving over to NortonLifeLock, the stock just came off a solid report in late July, posting revenue growth of 13% year-over-year and a meaningful increase in operating margins (51.2% vs. 47.1%). This translated to a sharp increase in quarterly earnings per share, which climbed 35% year-over-year to $0.42, beating consensus estimates ($0.40 – $0.41). The company recently launched a new Game Optimizer for gamers, with this maximizing gaming performance while also bolstering security. NLOK noted that the product “frees PCs from power-hungry programs which run in the background that tie up system resources,” with this product offering another avenue of growth for the company. Meanwhile, the company also launched a Crypto Product, with Norton Crypto providing a secure and reliable way to mine Ethereum. The product provides the ability to track and transfer earnings into their Norton Crypto Wallet, protecting earned money in the cloud so it can’t be lost from a hard drive failure.

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In terms of current results, operating margin expansion was driven by G&A efficiencies, with NLOK posting another quarter of net customer adds. This has pushed customers to 23.1MM as of fiscal Q1 2022. The company also reaffirmed its FY2022 guidance, forecasting 9% revenue growth at the mid-point and annual EPS of $1.70. With NLOK trading at a share price of just $26.90, this leaves the stock trading at barely 15.6x this year’s estimates and less than 14x FY2023 earnings estimates. With a high single-digit compound annual EPS growth rate since FY2015, NLOK is not a high-octane growth company by any means. However, it is a steady low-growth play trading at a reasonable valuation of just 14x FY2023 earnings estimates.

(Source: YCharts.com, Author’s Chart)

Based on what I believe to be a fair earnings multiple of 15.5, I see a fair value of $30.22, which only offers 13% upside from current levels. However, the stock is a name worth keeping on one’s shopping list if we do see a pullback. As shown from the technical picture below, the stock has broken out of a massive downtrend, and a re-test of its recent lows near $24.10 would present a low-risk buying opportunity. This is because it would push upside to fair value to more than 25% and fill the gap on the chart, which might shake out some weak hands.

Chart, histogram Description automatically generated

(Source: TC2000.com)

With the general market both extended and becoming expensive, it’s getting more and more challenging to find stocks with meaningful upside to fair value that also have limited downside. Obviously, many growth names could easily launch another 40% from here if the market remains ebullient. However, the issue is that at 25-30x sales, the downside is quite significant as well, weighing on the reward/risk ratio. Fortunately, HPQ and NLOK offer some safety margin and look like excellent buy-the-dip candidates if we do see weakness in the coming weeks. For now, I have no positions in either stock, but I may look to buy if we do see a pullback to either $27.25 on HPQ or $24.10 on NLOK.

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Disclosure: I have no positions in any names mentioned but may start a short position in QQQ in the coming weeks

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

NLOK shares were trading at $26.98 per share on Thursday afternoon, up $0.28 (+1.05%). Year-to-date, NLOK has gained 31.83%, versus a 20.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More…

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