3 Unloved Tech Stocks to Buy Now

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Unloved stocks in neglected sectors means potential bargains. One sector that seems to be losing steam is technology. A recent string of earnings reports in the tech sector has left these three companies looking attractively valued.

Surface problems

A disappointing quarter, plagued by a $900 million charge related to Surface RT tablet inventory, sent shares of Microsoft (NASDAQ: MSFT) down by more than 10%. The charge alone gave a $0.07 haircut to the company's earnings. Overall earnings came in at $0.59 a share, as opposed to the $0.75-a-share estimate expected by analysts. That's a huge miss. 

Still, there is hope. Declining PC sales are troubling, but the company still managed to increase revenues by roughly 10%-- especially where it matters most. Arguably the most important division of the company, the Microsoft Business Division (which includes Office sales), saw a 14% gain in revenues. Office is one of the company's biggest money makers, and is now at a $1.5 billion annual revenue run rate, according to PC World

Xbox Live, the gaming and digital media delivery service that charges users a fee to play multiplayer games online, also saw sales jump nearly 20%, which may carry over to the new Xbox One console scheduled to be released later this year. 

Microsoft is also incredibly strong financially and is one of only a few companies in the entire world with a AAA credit rating:

<img alt="MSFT LT Debt Chart" src="http://media.ycharts.com/charts/b4c0dc88635b6012d4480f183f407a65.png" />

MSFT LT Debt data by YCharts

The company is also turning into a dividend growth gem, with a low payout ratio and plenty of free cash flow:

<img alt="MSFT Dividend Chart" src="http://media.ycharts.com/charts/dc8c2289045cf4812a04cfe07fdcf2cf.png" />

MSFT Dividend data by YCharts

With a payout ratio around 34%, Microsoft pays out a dividend yielding a tad under 3%, which can provide an investor with a relatively safe source of income. The income won't cost you an arm and a leg either, with shares trading at a cheap 12 times earnings, and around 10.5 times forward earnings.

"Big Blue" in big trouble?

Another technology stock recently causing concern among many investors is IBM (NYSE: IBM). Shares of IBM are also trading cheaply in relation to earnings, sporting a P/E ratio of about 14 and a forward P/E ratio of around 11. IBM, like Microsoft, also dropped over 10% because of missed earnings-- two quarters ago.

IBM's most recent quarter, however, was different. The company beat on earnings, even though revenues came in light. 

The balance sheet holds a lot of debt and the company is fairly leveraged:

<img alt="IBM LT Debt Chart" src="http://media.ycharts.com/charts/9fa14dd2164acf8d0698cc1fe0544fac.png" />

IBM LT Debt data by YCharts

The high debt-to-equity ratio, however, can also be attributed to IBM's extensive buyback program and global financing arm. The company still manages to generate massive amounts of free cash flow, which gives it more maneuvering room:

<img alt="IBM Dividend Chart" src="http://media.ycharts.com/charts/73bff4dd3e949520679b7e46a3cdbdb2.png" />

IBM Dividend data by YCharts

IBM has paid out a dividend every year since 1916, and also has an impeccable record of raising its dividend every year. Shares currently yield only about 1.90%, but with an extremely low payout ratio of 25%, IBM's dividend is one of the safest on the market.

Even though it's a favorite of Warren Buffet, and coming off of a good quarter, shares still aren't that expensive. IBM's future prospects look bright, with the company recently raising its full-year outlook.

A discounted glass-maker

Corning (NYSE: GLW) is a leader in the display technologies segment, and also provides the glass for most touch devices (from iPhones to the Galaxy S4). Corning recently beat estimates on both its top and bottom lines, but shares still fell by as much as 3%.

Corning was already cheap, but the drop in share price provides an even better entry point for investors. Corning trades at only 13 times earnings, and around 11 times forward earnings.

This unloved, boring stock is also maintains a solid balance sheet boasting more cash than debt:

<img alt="GLW LT Debt Chart" src="http://media.ycharts.com/charts/7731f7ecd71a44ebff3792b424d18ef0.png" />

GLW LT Debt data by YCharts

Corning also seems to have gotten the hint that investors love dividends, as it has begun to increase its payout:

<img alt="GLW Dividend Chart" src="http://media.ycharts.com/charts/de0d5da2153161ef072de83353aa8ed4.png" />

GLW Dividend data by YCharts

A trend of consistent dividend increases may eventually attract a bigger crowd. Shares currently yield around 2.60%.

So what about the future? Corning's CEO elaborated that its signature Gorilla Glass product can eventually evolve into a $2 billion market. Keep in mind that this product wasn't even existent 5 years ago, and it now accounts for 17% of the company's revenues, according to Bloomberg. Gorilla Glass is now found in over 1.5 billion devices.

Gorilla Glass will also provide great growth if the company successfully integrates it into things such as car windshields, which it plans to, according to Corning Vice President Jeff Evans. Bigger pieces of glass mean more profits for Corning. 

The bottom line

Microsoft, IBM, and Corning seem to be in Mr. Market's doghouse for now-- especially Microsoft. Quarterly concerns don't always spell long-term doom, however. Microsoft is incredibly strong financially and pays out a safe, income-generating dividend

IBM may be a better bet for those seeking capital appreciation. The company's recent quarter, while not stellar, was a huge improvement from the quarter preceding it.

With such a strong balance sheet and coming off a relatively strong quarter, Corning is a great value play with good growth prospects.

These three companies make a nice little basket of dividend-paying tech stocks. Just make sure to keep your eyes on their performance as you're collecting your dividends. 


Joseph Harry owns shares of International Business Machines., Microsoft, and Corning. The Motley Fool recommends Corning. The Motley Fool owns shares of Corning, International Business Machines., and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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