Don't Miss Out On These 2 Hot Tech Stocks

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Includes: MSFT, NOK, STX
by: Ry Frank

Software giant Microsoft (NASDAQ:MSFT) is far more than just a personal computer software company. Its game consoles and cell phone operating system have helped to renew the energy, as well as the revenues of the company. But, since touching near $60 per share late in the 1990s, the stock has languished within a few dollars of $30 per share for nearly all of the past twelve years - all the while profits have continued to grow. So what is an investor to do? Let's take a closer look.

Microsoft's fiscal year ends June 30. So, in the third quarter of its fiscal 2012, Microsoft posted earnings of $5.11 billion, or $0.60 per share. Year-ago earnings were $5.23 billion, or $0.61 per share, but the year ago included a one-time, tax settlement credit of $463 million, or $0.05 per share. Revenues in the fiscal third quarter were $17.41 billion, up 6 percent from the year ago, and a quarterly record for the company.

For a glimpse into the historical rift in the company's valuation, let's take a snapshot of Microsoft's finances in 2001 versus 2011. Revenues in 2001 were $25.2 billion, and in 2011, were $69.9 billion. Profits in 2001 came to $1.001 billion, or $0.90 per share. In 2011, profits were $23.2 billion, or $3.09 per share. Shares outstanding in 2011 at 8.37 billion were over 2 billion less than in 2001.

Shareholders equity and return on shareholders' equity was substantially higher in 2011 than in 2001. There is now a growing dividend, in 2001 there was none. By any measure, Microsoft is a better company today than a decade ago. But a decade ago, Microsoft had a frothy average price to earnings ratio of 35.3, while in 2011, the average price to earnings ratio was under 10. The stock was not gone anywhere for over a decade.

In recent times, Microsoft acquired internet video voice over internet protocol leader Skype for an improbably expensive $8.5 billion in 2011. Skype had been valued at less than $3 billion one year earlier. It is difficult for me to see where Microsoft is going to make a reasonable return within Skype's framework. On the other hand, the coup for Microsoft of 2011 was its alignment with fallen Finnish cellphone giant Nokia (NYSE:NOK).

One can, for Nokia's sake, hope that Microsoft learned from its fiasco with South Korea's LG Electronics, in which in 2008 the Korean giant linked a deal to have Microsoft Windows be LG's main platform for its smartphones, but as any scan of the marketplace shows, LG is firmly a Google (NASDAQ:GOOG) Droid user. Nokia has fewer options than LG, and due to Microsoft's contractual commitment to supply $1 billion cash to assist Nokia in the development of hardware to match the Microsoft Windows operating system.

I doubt greatly that the Nokia/ Microsoft marriage will end in bliss. The mobile Windows system had a market share of just 1.9% in the first quarter of 2012, a 27% loss of market share from the previous quarter. I do not see those who have used Droid system phones leaving the offerings of that platform to switch to the Microsoft system.

Some 90% of Microsoft's over $50 billion cash hoard is kept overseas. If that cash were to be repatriated to this country, there would be a 30% tax on those funds. By buying overseas companies like Skype and paying cash for it, Microsoft was able to exploit the cash without paying U.S. Taxes on it. Similar acquisitions are likely.

An updated Windows 8 operating system is on the cusp of being sold, and Microsoft's ubiquitous Word, and Office platforms are also performing well. Microsoft's gaming console is the number one selling such system, but the entire industry is undergoing sales declines.

Earnings for Microsoft are going to essentially be flat in fiscal 2012 compared to its fiscal 2011. But analysts foresee a 10 percent advance in earnings in 2013. It is time for this stock's price to move commensurate with a market leading, global, virtually debt free company with moderate growth ahead of it. This is not an electric utility, and deserves a price to earnings ratio of not less than the market overall. Microsoft is worth $36 to $38 right now, and I can see it trading in the $50 per share range by mid-decade. Conservative investors, take note.

Seagate Technology (NASDAQ:STX) is probably my favorite pick within the technology sector. Seagate is the world leader in magnetic, hard disc drives that are in virtually every desktop or laptop computer. Many of these devices are built in Southeast Asia in general, and Thailand in particular. The country was devastated by flooding in autumn, 2011. Seagate came through that with its facilities intact relative to its competitors, and was able to increase its market share, prices, margins, and profits.

In the first quarter of 2012, Seagate, whose fiscal year like Microsoft's ends with the end of June, reported third quarter fiscal year revenue of $4.4 billion, compared to $2.7 billion in the same quarter last year. Earnings, after one-time adjustments, were $1.2 billion, or $2.64 per share, compared with $0.21 per share a year earlier.

Seagate is also committed to treating its shareholders well. Its current dividend yield is 3.5%, and it is now on another share repurchase plan, this one for $2.5 billion, which combined with an earlier plan gives the company $3.5 billion total to buy shares, effective late April. Seagate has already retired over 20% of its stock since 2007.

About the only fly in Seagate's ointment is the growth of mini computers and so called "pad notebook" computers that utilize solid state drives, now offered by virtually all major personal computer manufacturers. But Seagate's specialty, traditional hard drives, will be the dominant storage device for many years to come. Seagate does offer a variety of solid state hard drives, but it is not the world leader in that format that it is in traditional hard drives.

Seagate's growth in revenues and profits is not yet reflected in its stock price. I see the company's earnings at about $8.00 per share this calendar year, implying a current price to earnings ratio of 3.5. I am not alone in my interpretation that growth will continue at a rapid pace for several years, as the company has a 5-year estimated PEG of 0.10, the lowest I have seen. Whether you are a value investor or a growth investor, follow this stock carefully. A value like this one does not arrive that often.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.