# Investing 101: Check Out 10 Undervalued Technology Stocks

(List compiled by Becca Lipman)

Interested in technology companies? For this list we searched for technology companies that are deemed undervalued by two analyst strategies: Levered free cash flow and the Graham number.

We began with a universe of technology stocks with market caps over \$300M. We narrowed the list down to those undervalued by the Levered free cash flow to Enterprise Value ratio and kept only the names undervalued by over 5%.

Next, we searched for the technology companies undervalued by the Graham Number. The “godfather of value investing” himself, Benjamin Graham, created the Graham Number equation to calculate the maximum fair value for a stock. Any stock trading at a significant discount to this number would appear undervalued.

Our final list, detailed below, includes the names undervalued by the Graham number by over 27%.

Having trouble with these terms? Have no fear, we all start at the beginning. Let’s take a look at these key terms and why they are valuable tools in analysing a company’s value.

Market capitalisation,
commonly referred to as market cap, is the total market value of a company’s outstanding shares. It can be thought of as a measure of company’s size. It can be calculated by multiplying the number of shares by the current price of the shares.

A company’s size can matter when examining risk. Stocks with large market caps are generally less volatile than those with small market caps.

Graham Number: According to Benjamin Graham, a former mentor of Warren Buffett and the so-called “Godfather” of value investing, the Graham Number is the maximum price that a value investor should pay for a given stock. A stock whose share price is below the Graham Number is considered to be undervalued or of good value.

It is a calculation for the fair-value price of a stock based on its earnings per share (EPS) and most recent quarter’s book value per share (the value of the company’s assets divided by the number of shares).

The Graham Number = Square Root of (22.5) x (TTM EPS) x (MRQ Book Value per Share).

We use trailing 12 month (TTM) diluted EPS. Trailing twelve months (TTM) is an indication that the calculated data has come from the last 12 months.

Levered Free Cash Flow is a calculation of the amount of cash that a company holds after it has paid taxes, repayments on its debts, and any expenditures to maintain or expand business (Capital Expenditure or CapEx). In other words, levered free cash flow is the money that the business can use to grow and pay dividends to shareholders.

Enterprise Value is an alternative measure of a company’s value (instead of using market cap). Theoretically, it is the cost of taking over a company, calculated as market cap plus debt and liabilities minus cash. For example, if Company A were to buy 100% of Company B, it would need to buy all the outstanding shares, the value of which is the market cap. Company A would then be stuck with any debts and liabilities that Company B had. But Company A would also get all of the cash that Company B had in the bank, which would help pay off the debts, etc.

Because cash is an important asset for a company (it allows them to buy new machines, hire more people, etc) and because it is hard to lie about how much cash a company has, a company that holds more cash is seen to be of better value.

The levered free cash flow to enterprise value ratio (LFCF/EV) is one method of measuring the value of a company. The more free cash a company has relative to its enterprise value (a high ratio), the cheaper the company appears.

Do you think these companies are undervalued? Use the following information as a starting point for your own analysis.

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1. MagnaChip Semiconductor (MX): Semiconductor Industry. Market cap of \$385.33M. Current price at \$9.79. TTM Diluted EPS at \$3.03, MRQ book value per share at \$4.86, Graham number at \$18.2 (vs. current price at \$9.79, implies a potential upside of 85.93%). Levered free cash flow at \$35.83M vs. Enterprise value at \$385.51M, implies a LFCF/EV of 9.29%. It’s been a rough couple of days for the stock, losing 5.87% over the last week.

2. ManTech International Corporation (MANT): Security Software & Services Industry. Market cap of \$1.30B. Current price at \$35.27. TTM Diluted EPS at \$3.65, MRQ book value per share at \$28.09, Graham number at \$48.03 (vs. current price at \$35.27, implies a potential upside of 36.18%). Levered free cash flow at \$177.30M vs. Enterprise value at \$1.25B, implies a LFCF/EV of 14.18%. The stock has performed poorly over the last month, losing 22.82%.

3. Hewlett-Packard Company (HPQ): Diversified Computer Systems Industry. Market cap of \$64.40B. Current price at \$31.05. TTM Diluted EPS at \$4.07, MRQ book value per share at \$19.48, Graham number at \$42.24 (vs. current price at \$31.05, implies a potential upside of 36.03%). Levered free cash flow at \$7.49B vs. Enterprise value at \$72.18B, implies a LFCF/EV of 10.38%. The stock has performed poorly over the last month, losing 12.39%.

4. Comtech Telecommunications Corp. (CMTL): Communication Equipment Industry. Market cap of \$690.58M. Current price at \$26.52. TTM Diluted EPS at \$2.22, MRQ book value per share at \$25.83, Graham number at \$35.92 (vs. current price at \$26.52, implies a potential upside of 35.44%). Levered free cash flow at \$94.90M vs. Enterprise value at \$283.67M, implies a LFCF/EV of 33.45%. The stock has gained 28.18% over the last year.

5. France Telecom (FTE): Telecom Services Industry. Market cap of \$47.84B. Current price at \$18.06. TTM Diluted EPS at \$1.68, MRQ book value per share at \$15.31, Graham number at \$24.06 (vs. current price at \$18.06, implies a potential upside of 33.2%). Levered free cash flow at \$9.62B vs. Enterprise value at \$92.28B, implies a LFCF/EV of 10.42%. The stock has lost 5.69% over the last year.

6. Western Digital Corp. (WDC): Data Storage Devices Industry. Market cap of \$7.08B. Current price at \$30.46. TTM Diluted EPS at \$3.09, MRQ book value per share at \$23.55, Graham number at \$40.46 (vs. current price at \$30.46, implies a potential upside of 32.84%). Levered free cash flow at \$409.50M vs. Enterprise value at \$3.59B, implies a LFCF/EV of 11.41%. The stock has performed poorly over the last month, losing 18.29%.

7. Lam Research Corporation (LRCX): Semiconductor Equipment & Materials Industry. Market cap of \$4.81B. Current price at \$38.63. TTM Diluted EPS at \$5.79, MRQ book value per share at \$19.94, Graham number at \$50.97 (vs. current price at \$38.63, implies a potential upside of 31.94%). Levered free cash flow at \$363.43M vs. Enterprise value at \$3.14B, implies a LFCF/EV of 11.57%. The stock has gained 1.02% over the last year.

8. Brocade Communications Systems, Inc. (BRCD): Data Storage Devices Industry. Market cap of \$1.73B. Current price at \$3.6. TTM Diluted EPS at \$0.21, MRQ book value per share at \$4.58, Graham number at \$4.65 (vs. current price at \$3.6, implies a potential upside of 29.22%). Levered free cash flow at \$168.91M vs. Enterprise value at \$1.99B, implies a LFCF/EV of 8.49%. It’s been a rough couple of days for the stock, losing 26.38% over the last week.

9. Itron, Inc. (ITRI): Scientific & Technical Instruments Industry. Market cap of \$1.60B. Current price at \$39.38. TTM Diluted EPS at \$2.83, MRQ book value per share at \$39.74, Graham number at \$50.3 (vs. current price at \$39.38, implies a potential upside of 27.74%). Levered free cash flow at \$96.72M vs. Enterprise value at \$1.93B, implies a LFCF/EV of 5.01%. The stock has performed poorly over the last month, losing 16.66%.

10. Fairchild Semiconductor International Inc. (FCS): Semiconductor Circuits Industry. Market cap of \$1.76B. Current price at \$13.78. TTM Diluted EPS at \$1.35, MRQ book value per share at \$10.12, Graham number at \$17.53 (vs. current price at \$13.78, implies a potential upside of 27.23%). Levered free cash flow at \$90.80M vs. Enterprise value at \$1.50B, implies a LFCF/EV of 6.05%. The stock has performed poorly over the last month, losing 14.57%.

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

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