These Tech Titans Are Attractively Priced

by: Marc Courtenay

"In my experience, selling a put is much safer than buying a stock." -- Kyle Rosen (Boston Capital Management, Barron's 8/23/04)

The companies I'm referring to in the title of this article would be good candidates for selling LEAP puts. You'd collect the premium and the worse that might happen is you'd have 100 shares "put" to you at the strike price. When you subtract the option premium you collected from the strike price that would be your cost basis for the stock purchase. Most put sellers "buy-to-cover" well before the option contract expires.

In my last article I discussed the prospects for Cisco Systems (NASDAQ:CSCO) and Oracle (NYSE:ORCL). If you liked both companies at the March 7th prices you should like them even more now.

ORCL's earnings and revenue miss announced March 20th coupled with several analysts downgrading the shares led to a 9% stock price "hair-cut" on enormous volume on March 21st. If you're an ORCL shareholder or thinking of becoming one I encourage you to study its website page which gives all the numbers from the 3rd quarter fiscal year 2013 earnings release as well as the conference call.

The company's EPS, when using GAAP EPS was actually up 6%. As the official ORCL earnings report stated, "Without the impact of the U.S. dollar strengthening compared to foreign currencies, Oracle's reported Q3 GAAP earnings per share would have been $0.01 higher at $0.53, up 8%,and Q3 non-GAAP earnings per share would have been approximately $0.01 higher."

"Total revenues also would have been 1% higher and new software licenses and cloud software subscription revenues would have been 2% higher than reported." These "would have beens" aren't consoling investors today, but this kind of earnings report does allow for good buying opportunities.

It's plain to see when you consider that with over $33 billion in total cash and dozens of recurring revenue streams that ORCL will find ways to make a strong comeback. In the past, the company's misses have led to good entry prices for its stock. ORCL's November 2011 miss was followed by a nice rebound in Feb. 2012 results.

The current quarter is historically Oracle's seasonally strongest quarter, and since guidance is now quite conservative patient investors might be rewarded when the company reports its next earnings report on June 17th. If you're skeptical let the stock find a bottom, bounce off it, test it again and begin to move higher first.

Technology titans like ORCL which are trading at less than 12 times forward earnings represent good value. Another tech powerhouse that is trading below 12 times forward (1-year) earnings is EMC Corp. (EMC).

In a recent article I wrote titled, "Two Techs for the Price of One", EMC owns a 78% stake in another technology superstar VMware (NYSE:VMW) which rocketed over 8% higher on Wednesday March 13th after EMC announced at an analysts meeting in New York that it plans to spin off a new company based on the collection of assets that are known as the "Pivotal Initiative."

As I mentioned in the article, "What I understand at this point is that Pivotal will incorporate EMC's Greenplum and Pivotal Labs acquisitions, while VMware will contribute its Cloud Foundry, Cetas, Spring and Gemfire groups to the new company, which will be headed by former VMware CEO Paul Maritz, who has been running the Pivotal effort within EMC." The new company will have around $300 million in revenue this year and 1,250 employees. EMC will own 69% of the new company while VMW will own the other 31%.

EMC shares have corrected since this announcement, mainly as part of the market's correction on March 21st and in sympathy with ORCL's sell-off. Remember, EMC dominates data storage and recently gained an additional share of the business as it keeps growing internationally.

EMC's RSA Data Loss Prevention security solutions technology is positioned as a Leader in Gartner's 2013 Magic Quadrant for Content-Aware Data Loss Prevention based on completeness of vision and ability to execute. Between its impressive array of products and services, its majority ownership of VMW, and global sales operations I'm anticipating its operating margin to top 20% this year.

On April 24th it will report earnings. The company's guidance on EPS is modest, and analysts' consensus estimate on sales growth and revenue for the current quarter calls for only a 6.4% increase. EMC's cash and marketable securities are currently around $6.2 billion, and I anticipate that increasing this quarter as well. The company may announce a dividend at its next quarterly conference call in late April.

EMC's shares as of March 21st are below $25 a share. Along with the analysts' average 1-year target price of over $30 and the recent news of a spin-off of its "Pivotal Initiative" in the near future, EMC represents a compelling investment theme.

The large-cap technology sector as a whole looks undervalued to me. As the first quarter of 2013 comes to a close and the second quarter begins it's good to be reminded that for tech titans, the second quarter is usually the most profitable quarter of the year.

If you want to buy incrementally you might consider buying a long-term LEAP call and at the same time selling a long-term put at the identical strike price. It's like collecting a "dividend" right away and when the underlying shares rally you can "buy-to-cover" or let the put you sold expire while keeping the premium you received.

Discuss this with your brokerage firm and be totally familiar with LEAP options before taking that approach. The main take-away from this article is that these tech titans -- and don't forget Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) and Cisco Systems -- are trading at very reasonable valuations.

The "Smart Money" won't chase stocks that have already hit new highs and trade for ridiculous multiples. They "shop" for the best quality, industry leaders that are out of favor and at bargain price levels.

With ORCL and EMC you have two examples that are likely to reward and surprise to the upside in the quarters ahead. ORCL is one to watch and EMC is already priced for accumulation.

Disclosure: I am long CSCO, EMC, INTC, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.