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3 of the Cheapest Tech Stocks on Earth (Yes, One of Them is Apple)

Saturday - 4/20/2013, 6:00pm  ET

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 - 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 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 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'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'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 - 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 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.

From an investment perspective Intel is hardly an exciting stock, but it certainly has some qualities that make it attractive to value investors. For starters, Intel's valuation makes it among the cheapest large-cap technology names in the market. Shares are trading at a forward P/E of around 10.4, a forward multiple of just under 11, and a PEG ratio of 0.91. Both its price/sales and price/book ratios are slightly above 2, and the stock's Enterprise Value/EBITDA multiple is around 4.6.

What makes Intel even more compelling is its consistent, steady business and its current yield of over 4%. Given that the 10-Year Note was recently yielding 1.70%, the opportunity to own a blue-chip stock like Intel at its current valuation and yield is attractive compared to many alternatives. On the other hand, Intel is only expected to post very modest revenue growth in fiscal 2013 and 2014.

In fiscal 2012 the company reported net sales of $53.341 billion. Analysts anticipate that revenue will grow to $53.68 billion in 2013 and rise to $56.14 billion in 2014. Although Intel has made an aggressive effort to capture market share in the rapidly growing mobile market, the company retains significant exposure to PCs.

A recent report from Gartner showed that PC shipments fell 11.2% in the first-quarter of 2013 to the lowest level since the second-quarter of 2009. One group that has recently profited in the stock is none other than Warren Buffett's Berkshire Hathaway. The firm's Geico unit purchased 11.5 million Intel shares in the second half of 2011, only to unload the investment less than a year later for a profit of roughly $60 million.

Corning - This company is the worldwide leader in specialty glass and ceramics. Corning's components enable high-technology systems used in the manufacture of consumer electronics, mobile emissions control, telecommunications, and life sciences. Corning "Gorilla Glass" is used in smartphones, tablets, notebooks, and high-end televisions manufactured by a host of leading technology companies.

Although Corning has been a strong performer over the last decade, the stock has lost almost 50% in the last five years and is down a little less than 4% over the last 52-weeks. At current levels, Corning has a market cap of just over $19 billion. The stock's valuation is compelling, although net income has been choppy in recent years.

Nevertheless, Corning has managed to post annual sales growth over the last four fiscal years, and analysts are projecting that the company's top-line sales will post moderate increases in fiscal 2013 and 2014. Corning currently trades at a trailing P/E ratio of 11.4, a forward multiple of just over 10, and a PEG ratio of 0.94.

Even more interesting is the fact that the stock trades at a book value of 0.89, meaning that theoretically the entire company could be bought for less than its liquidation value. Corning also sports a relatively cheap Enterprise Value/EBITDA ratio of below 7. Investors will also find the stock's current dividend yield above 2.70% attractive in combination with its reasonable valuation.

When executed with skill and patience, value investing has proven to be a very effective method of achieving superior risk-adjusted returns over long periods of time. Although there are other considerations that go into the investment process, identifying cheap stocks that provide a margin of safety is one the of the tenets of the strategy.

The three stocks discussed in this article all possess qualities that adhere to the value investing philosophy. These companies operate proven and successful businesses, the stocks trade at relatively inexpensive valuations using a variety of metrics, and each provides investors with an attractive dividend yield. Apple, Intel, and Corning are all stocks that deserve a close examination by value-oriented investors looking to allocate capital to the technology sector.

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