Undervalued, Growth, Defense Tech Stocks To Buy

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

The rise of smartphones and tablet devices would naturally, you would think, cause electronic equipment producers to soar in value. However, unfortunately, growth stories have been complicated by underperformance in key segments that, if sold to niche producers, could help the business focus on its long-term area of value. To avoid getting sucked into a "value trap," I recommend playing it safe and buying a basket of beaten down stocks, growth stocks, and defensive stocks in the tech market. Below, I review 3 companies that fit the bill.

Corning Should Sell Off Underperforming Assets

Although the electronic equipment market has been very volatile, Corning (NYSE: GLW), with the exception of two noticeable years, has seen free cash flow trend consistently upwards from 2004 to today. Free cash flow currently stands at $1.1 billion--a yield of 6.8%. Although free cash flow is below the 5-year average, the stock declined 53.3% over the past 5 years. And at 8.6x past earnings and 0.74x book value, the stock is now fairly cheap, so the downside has been minimized.

The balance sheet is also very clean with a quick ratio of 4.3x. This October, National Securities gave the firm a "buy" rating with a $16 price target. It currently trades at $10.90 and has excellent growth opportunities ahead. First, Samsung has expressed that it will start production of OLED displays in the first half of next year. This will be a meaningful boon for Corning's Willow Glass. The glass business has been relatively soft in recent months, so this kind of momentum, which will expand margins, helps to "right the ship," if you will. Gorilla Glass has also been overly ignored. This kind of glass is used in smartphone and touch screens--thus affording  at least a sustainable stream of free cash flow. But declining glass prices and operational challenges for Sony and Panasonic have been a bit of a wet blanket for investors.

Many have been simply too quick to call Corning a "downside story." Performance has been better than expected in 4 of the last 5 quarters by an average of 7.7%. Sure, sales in LCD televisions are falling, but the average screen size is also going up. With many of the segments failing, however, it seems reasonable that Corning should sell its underperforming assets that are in the field and could benefit from greater scale. Because these underperforming assets are causing investors to unwillingly undervalue Gorilla Glass. In this way, Corning represents a potential takeover target.

Buy TE Connectivity for Growth, 3M for Defense

If Corning is too risky for you, I recommend diversifying in TE Connectivity (NYSE: TEL) and 3M (NYSE: MMM). TE Connectivity has the growth while 3M, by virtue of being a tech conglomerate, will help spread out risk across various interconnected industries. TE Connectivity trades at a respective 12.6x and 9.3x past and forward earnings, and delivers a strong amount of free cash flow at $1.4 billion. This implies a free cash flow yield of around 9.6%, and analysts recognize this value--rating it around a 1.7 out of 5 where "1" is a "buy."

During the third quarter, the company beat expectations by 2 cents on EPS of $0.76. The trend in ROA for TE Connectivity, however, has been, as a whole, less than stellar. It has held relatively steady around 6%-7% over the last year and a half--this lack of improvement may deter otherwise high-growth income investors. Even so, analysts forecast EPS growing by 10.1% annually over the next 5 years (around 200 bps below the rate during the past 5 years). Assuming expectations are met, 2016 EPS will come out to $4.89. At a multiple of 15x, this translates to a future stock value of $73.35. Discounting backwards by 10% yields a present value of $45.54, around a 35% premium to the current trading price.

And then 3M can serve as a way to hedge against uncertainty while remaining bullish on technology. There is a dividend yield of 2.7% and a target price of $100 on 3M's stock (it trades at $88.50), so already the stock looks fairly compelling from a risk/reward standpoint. When you add in 13% less volatility than the broader market and a large economic moat, it becomes clear that 3M is for risk-averse tech investors. But I wouldn't get too excited about growth: net income was challenged in 2008 and the early parts of 2009 and has increased only from $4.1 billion in 2007 to $4.4 billion today--a CAGR of just 1.4%.


TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Corning. Motley Fool newsletter services recommend Corning and 3M Company. 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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