Buy These Overshadowed Tech Stocks

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

If you are bullish on tech, I recommend also considering the stocks that have been largely overshadowed by Apple and the like in recent days. Microsoft and Oracle are two compelling investments with strong economic moats and consistent earnings growth. Although the former may be missing expectations and the latter behind the cloud curve, they are still heading towards steady EPS growth, which will drive up the stock price alongside, at least in Microsoft's case, a shareholder-friendly capital allocation policy. Below, I provide a few reasons why you should invest in both.

Why You Should Buy Microsoft (NASDAQ: MSFT)

At only a respective 14.7x and 8.4x past and forward earnings, Microsoft is incredibly cheap for its value potential. Analysts forecast 9.8% annual EPS growth over the next five years. Assuming Microsoft meets expectations, 2016 EPS will come out to $4.30. At a multiple of 14x, this translates to a future stock value of $60.20. Discounting backwards by 10% yields a present value of around $37.40, which is more than a 35% premium to the current market assessment. When you factor in a 3.4% dividend yield, reward strongly outweighs the risk involved.

There are several other reasons why I am optimistic about the software maker. 23 of 34 reporting analysts rate the stock a "buy" or better--13 of which even say "strong buy." Return on invested capital stands at 23.4%, or a full 660 bps above the industry average. A price-to-book multiple of 3.3x is also solidly below the 4.8x industry average. Surface sales have been disappointing, and Microsoft has reportedly cut fourth quarter sales of the product to just 2 million. MKM Partners has become bearish and is now forecasting only 3.3 million in sales for fiscal 2013. But the company is increasing distribution, and Microsoft will expand the tablet into non-Microsoft stores in the coming days.

The company also is not as exposed to the PC decline as the market would have you believe. In addition to making inroads into tablets, momentum is picking up on the mobile side. Nokia (NYSE: NOK) recently announced that China Mobile would market Windows Phone 8 models after Microsoft partnered with China Unicom in mid-2012. Windows Phone devices hold 3% of the Chinese market versus Android's 72% share, so, needless to say, there is strong room to penetrate and monetize. After more than doubling (up 135%) from the 52-week low and still offering a 6.6% dividend yield, Nokia is a joint investment that you could make to target upside on this emerging market potential. Northland Securities, after all, came out with a $6 price target on Dec. 6. And then there is Office 2013, which has recently been rolled out to businesses. Microsoft has been pushing touch-sensitive devices in Windows 8, Windows Phone, and Surface--Office 2013 complements this capability with a touch-friendly interface.

Why You Should Buy Oracle (NYSE: ORCL)

Oracle has similarly compelling risk/reward. At 11x forward earnings and tremendous free cash flow, investors are starting to pick up on the value. It has gained 29.3% from the 52-week low and is now near a 52-week high. During the last five years, R&D has risen by 79.2% while free cash flow has risen by 87.1% to $13.4 billion, or a yield of 8.7%. This has been supported by margin expansion and strong performance--three of the last five quarters have beaten expectations. Credit Suisse is now expecting Oracle to beat analyst expectations in next Tuesday's earnings call.

Strong performance has come from healthy momentum in application license sales and growing demand for Exadata and Exalytics. But the company is not resting on its laurels; it is investing in the future. In early November, Oracle announced the buyout of Instantis, an on-premise portfolio management software. This product will be integrated with the cloud-based Primavera and Fusion project for powerful synergy. Management is also looking to do a major acquisition a "couple of years down the road" and has thus far driven impressive organic innovation through the releases of a new flagship database platform and an Exadata upgrade, among other things.

Going forward, Oracle is forecasted for 11.9% annual EPS growth over the next five years. 25 of 39 reporting analysts rate the stock a "buy" or better. Return on invested capital is strong at 18% At the same time, this growth rate is expected to slightly lag the broader software industry.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft and Oracle. Motley Fool newsletter services recommend 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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