Facebook/Apple Euphoria Obscuring These 2 Value Plays

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Includes: AAPL, DELL, FB, HPQ
by: Takeover Analyst

In the midst of all the euphoria surrounding Facebook (NASDAQ:FB), Bloomberg reported that the company received a $70 per share bid. At its height, the social networking giant was already outrageously valued at Disney (NYSE:DIS) plus two-thirds of Ford (NYSE:F); at $70 per share, it would have been worth almost 4x the legendary U.S. automaker. Despite signs that the stock was enormously overvalued, Facebook has rallied nearly 30% since its June 6 low. This would be humorous if it weren't so serious: here's an ephemeral website that was a copy cat of MySpace bringing in retail investors. At the end of the day, it's really a sad commentary on humanity that so much faith could be wrapped up in momentum.

The Facebook Kool-Aid has been already been bashed by several bears on Seeking Alpha that it's tempting, at this point, to bring up Apple (NASDAQ:AAPL). While Apple has delivered strong execution and innovation, the optimism has overshadowed highly undervalued firms. Indeed, the market has indicated that the optimism was too high at its peak, sending shareholder value plunging 11.2%.

Apple is still a great company that is well positioned to capitalize on the loyal market it has fostered through introducing tablets, iPads, and sleek laptops - generally, it has been the tech leader. It is not like Facebook, because it has well diversified across music media and computer platforms. Technology may have few barriers to entry, but Apple's product portfolio puts the faddish website to shame. For that matter, it would put many tech companies', including Microsoft's, to shame. And while I continue to find the company undervalued at 14x past earnings, I believe that more attractive value can be found elsewhere in the sector.

Hewlett-Packard (NYSE:HPQ) and Dell (DELL) both trade absurdly around 7.1x past earnings, and much of this cheapness stems more from the lack of hype than anything else. Let's face it, HP and Dell are boring against next generation giants Apple and Facebook; but, they have a strong brand that can be easily leveraged in their competitive sector.

Both are free cash flow machines that are near their 52-week lows despite better-than-expected momentum. HP has beaten consensus for three of the last four quarters by an average of 4.2%. But during the last year, it has lost 45% of its value.

The $38.2B company generated $8.1B in free cash flow last year and has been consistent throughout the years. Apple is valued at 14x HP, but only generated 3.7x the free cash flow last year. Yes, Apple has delivered impressive growth over HP; but, it is not coming up against the "law of big numbers" and has few barriers of entry to impose against an HP rise. It is worth nearly 25.6x Dell, but only generated 6.2x the free cash flow last year. Facebook is worth 3.4x Dell, but only generated less than one-fifth the free cash flow last year.

Again, this is not a short thesis on Apple - or even Facebook for that matter. My view is that short positions are seldom worth the risk given that equities fundamental go up, not down. My main point is that investors should not lose sight on the value plays and look at what doesn't glitter. "HP" and "Dell" may not have the same ring that they did years ago, but they are still excellent producers of free cash flow and cheaply valued. In my view, it will take one catalyst from either firm to recover lost shareholder value and hit my bullish target prices.

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

Disclaimer: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer.