3 Undervalued Tech Stocks With Strong Sources Of Profitability

Includes: NSIT, SYKE, ZIGO
by: Kapitall

There is a lot more to profitability than whether a company's bottom line is increasing. Profits can come from several sources, with some better than others. To get a deeper look into a company's profit trends, we performed DuPont analysis on tech stocks that appear undervalued relative to earnings growth (with PEG below 1).

DuPont analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:

= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

We therefore focus on companies with the following positive characteristics: Increasing ROE along with,

• Decreasing leverage, i.e. decreasing Asset/Equity ratio
• Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.‬

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

Do you think these companies have strong profitability? Use this list as a starting point for your own analysis.

List sorted by increase in ROE.

1. Zygo Corporation (NASDAQ:ZIGO): Designs, develops, and manufactures ultra-high precision measurement solutions to enhance its customers' manufacturing yields; and optical sub-systems and components for original equipment manufacturers and end-user applications in the United States and internationally. Market cap of $305.75M. PEG at 0.76. MRQ Net Profit Margin increased to 14.71% from 8.77% year-over-year, Sales/Assets increased to 0.27 from 0.24, while Assets/Equity decreased to 1.23 from 1.25. The stock has gained 53.09% over the last year.

2. Sykes Enterprises, Incorporated (NASDAQ:SYKE): Provides outsourced customer contact management solutions and services in the business process outsourcing arena. Market cap of $786.84M. PEG at 0.90. MRQ Net Profit Margin increased to 5.99% from 4.64% year-over-year, Sales/Assets increased to 0.39 from 0.36, while Assets/Equity decreased to 1.36 from 1.38. The stock has had a couple of great days, gaining 7.89% over the last week.

3. Insight Enterprises Inc. (NASDAQ:NSIT): Provides information technology hardware, software, and service solutions to businesses and public sector clients. Market cap of $804.32M. PEG at 0.63. MRQ Net Profit Margin increased to 1.39% from 1.23% year-over-year, Sales/Assets increased to 0.83 from 0.79, while Assets/Equity decreased to 2.67 from 2.84. This is a risky stock that is significantly more volatile than the overall market (beta = 2.46). The stock has had a good month, gaining 18.87%.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

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