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The Situation Report

Both Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ) reported fairly downbeat results for the personal computer sector. HP reported a 10% year-over-year decline in PC revenue in FQ3. Dell was even worse, clocking in at a 22% year-over-year decline in PC revenues. This has caused a fairly major sell-off in two technology stocks with fairly high PC exposure. I believe that now is the time to cherry pick the best of the companies that were hit and get an excellent deal.

The Companies

When I cherry pick the best, I am looking for the following characteristics:

  • Bargain valuation
  • Rock solid balance sheet
  • Pay Dividends
  • Leaders in their respective fields (gaining market share on top of a winning position is also a nice bonus)
  • Capital and demonstrated interest in expanding the core businesses

These are symptomatic of a well managed companies that can survive short term headwinds in their core businesses and they'll pay you to wait. Without further ado, here are the two companies worth buying after the sell-off:

1. Intel Corporation (NASDAQ:INTC)

Intel is probably the least understood and most punished technology company in recent times. Their core business is x86 CPUs, but that doesn't mean "just PCs" (although they have over 80% of the PC CPU business). Windows 8 tablets are coming this year and will be powered by both high end "Ivy Bridge" CPUs as well as Intel's low cost, lower power Atom-branded CPUs.

Let's also not forget that Intel is by far the market share leader in the server space, has the most sophisticated chip manufacturing technology in the world and has been making strategic acquisitions coupled with organic R&D investments in order to bolster their entry into the smartphone space.

But putting all of that aside, Intel's valuation is simply too good to ignore at this point. Taking a look at the following picture says it all:

INTC PE Ratio Chart
(Click to enlarge)

INTC PE Ratio data by YCharts

While the share price is approaching the top of the "trading range" that many accuse Intel to be "stuck" in, the company's dividend yield is at historic highs at a very enticing 3.6% yield (because the company is committed to consistently raising the dividends), the price-to-earnings ratio is at historic lows, and it has a fortress of a balance sheet with roughly $14B in cash and only $7B in long term debt.

Oh, and one more thing. As if the generous dividend wasn't a good enough return of capital to shareholder (36% payout ratio), the company further brings value to shareholders by significantly reducing its share count over the last 10 years. I have no doubt that the buybacks will continue.

INTC Shares Outstanding Chart
(Click to enlarge)

INTC Shares Outstanding data by YCharts

My suggested strategy here is to either buy the stock outright between $24.00 - $25.00 or to sell some puts at the $24 or $25 strike at dates where you can get a good premium for them (but I'm not entirely convinced this strategy will actually get you the shares).

2. Seagate Technology PLC (NASDAQ:STX)

Seagate is one of those technology companies that went ahead and proved nay-sayers wrong. In 2011, the stock hovered in the $9-10 range until the Thailand flooding wreaked significant havoc on the whole hard disk supply chain. Seagate, unlike its chief rival, Western Digital (NASDAQ:WDC), didn't have its factories directly hit; its shortage problems were due to the high concentration of the rest of the hard disk supply chain in Thailand. With a shortage in place, hard-drive prices skyrocketed, but Seagate was able to undercut its competitor while still nailing higher gross margins, which led to a staggering market share increase from 29% to 42% post Thai Flood.

STX Gross Profit Margin Chart
(Click to enlarge)

STX Gross Profit Margin data by YCharts

With Dell and HP reporting lackluster PC sales results, shares of the hard disk maker dropped over 4%. But this is completely irrational. While PC sales slumped, the vaunted "cloud" that all tablets and smartphones (which have very limited internal storage) rely on for data storage and access requires lots of hard disks (solid state drives in this area are gaining traction, but as complementary caching devices). Further, as users opt for smaller-but-faster solid state drives in their notebooks, they will come to rely increasingly on both cloud storage as well as secondary external hard disk drives for all their raw data like movies, music, and photos.

Turning to the fundamentals of the company:

STX Gross Profit Margin Chart
(Click to enlarge)

STX Gross Profit Margin data by YCharts

The company's been furiously buying back shares and has a solid dividend yield of 3.8%. Further, revenue and gross margins have skyrocketed with the company seeing "record sales." On a valuation basis, despite the share price hanging out near all-time highs, the price-to-earnings ratio is sitting near all-time lows.

STX PE Ratio Chart
(Click to enlarge)

STX PE Ratio data by YCharts

With a strong yield, a shrinking share count, increasing market share, strong gross margin profile, all coupled with a strong long term transitional strategy into flash storage solutions (particularly hybrids), this is one company worth taking a serious look at if the PC induced sell-off continues.

Source: Don't Panic: Consider These 2 Stocks After HP's And Dell's Earnings Bomb