2 Tech Stocks That May Appear Cheap On The Outside, But Should Be Avoided In The Short Term

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 |  Includes: DELL, MSFT
by: Matt Schilling

Many investors and potential investors have asked me how I determine the value of a specific company's stock. When it comes to stocks there are few things I consider, but one of the most important things to look at in my opinion, is the company's P/E ratio. The price to earnings ratio signifies the affordability of a stock based on the share price compared to that of the EPS. On the contrary, I wanted to highlight two tech stocks that may be cheap at current levels, but may sustain continued negativity in the short term. For this particular screen I wanted to examine two companies that have warned 2nd quarter earnings my fall short of estimates.

Dell, Inc.- (DELL): Dell, which trades in a 52-week range of $11.68 (52-week low) and $18.36 (52-week high), has traded up roughly 1.7% over the last few trading sessions and could continue to demonstrate similar behavior throughout the second half of the year. One the key catalysts for potential investors would the company's current P/E ratio which is 7.21. Currently, DELL is expected to grow at rate of -14.8% for the quarter and -8.9% for the year. When compared to the S&P 500, which is expected to grow 10.3% for the quarter and 9.7% for the year, those numbers are certainly not that impressive. For potential investors looking to establish a position in Dell, second quarter earnings should be examined a bit closer. The company is expected to earn $0.46/share on revenue of $14.76 billion for the second quarter. Given the fact the company has missed analysts' estimates in the last two quarters, an earnings estimate beat of 5% - 7% would positively contribute to the company's growth. However, a warning by Dell back in May, may be a continued sign of weakness in the PC sector. In terms of establishing a position at these levels, I'd remain cautious as second quarter estimates are calling for a significant retraction in growth.

Microsoft Corporation - (MSFT): Microsoft, which trades in a 52-week range of $23.79 (52-week low) and $32.95 (52-week high), has traded up roughly 3.5% over the last few trading sessions and could continue to demonstrate similar behavior throughout the second half of the year. One the key catalysts for potential investors would the company's current P/E ratio which is 11.25. Currently, MSFT is expected to grow at rate of -10.1% for the quarter and -0.4% for the year. When compared to the S&P 500, which is expected to grow 10.3% for the quarter and 9.7% for the year, those numbers are certainly not that impressive. For potential investors looking to establish a position in Microsoft, second quarter earnings should be examined a bit closer. The company is expected to earn $0.62/share on revenue of $18.17 billion for the second quarter. Given the fact the company has surpassed analysts' estimates in three of the last four quarters, an earnings estimate beat of 5% - 7% would positively contribute to the company's growth. However, an article written by Kofi Bofah, highlighted the fact that Microsoft may be considered a poor investment at current levels." As a $260 billion corporation, Microsoft must introduce a game-changing product to the marketplace in order to move the needle. To date, Microsoft's strategy revolves around Windows updates, Xbox gaming, and throwing money at sectors where it has already been left behind". In terms of establishing a position at these levels, I'd remain cautious as second quarter estimates are calling for a significant retraction in growth.

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