- The Nasdaq Composite has outperformed the S&P 500 and the Dow Jones Industrial Average so far in 2023 by a wide margin.
- High-growth tech stocks are back in favor after last year’s extreme selloff as money flows back into the sector.
- As such, I used the InvestingPro stock screener to find high-quality, undervalued tech gems to buy now with strong upside ahead.
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The tech-heavy NASDAQ has been the best performer of the three major U.S. indexes by a wide margin so far in 2023, rising 22.8% as investors turned back to the beaten-down growth stocks of yesteryear.
That compares with a 7.3% year-to-date increase for the benchmark S&P 500 index and a 0.3% decline for the blue-chip Dow Jones Industrial Average.
With that in mind, I used the InvestingPro stock screener to identify the best undervalued technology stocks to buy amid the current market environment.
With InvestingPro, you can easily access comprehensive information and perspectives on a company in one place, eliminating the need to collect data from multiple sources such as SEC filings, company websites and market reports.
In addition to analyst goals, InvestingPro provides a one-page view of complete information, saving you time and effort. Try it for free for a week!
h2 My methodology:/h2
Using the InvestingPro stock screener, I ran a methodical approach to filter the 7,500-plus stocks listed on US exchanges into a small actionable watchlist of high-quality technology companies that are expected to provide investors with solid returns will deliver in the coming months.
My focus was on tech companies that have strong upside, solid profitability, a healthy balance sheet, positive free cash flow, and robust growth prospects.
To find those companies I first scanned for names with a 10% or more Return on Common Equity (ROCE). In general, a high ROCE indicates that a company is generating high profits from its equity. It is a ratio used to measure the amount of profit or net income that a company earns per investment dollar.
Source: InvestingPro, Screener Screen
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I then looked for stocks that also had a greater than 10% return on invested capital (ROIC)which is a financial metric that can help assess whether a company creates value with its investments.
I then limited that to companies at least 10% average annual growth in EBITDA margins, which is a popular and widely used profitability metric. It measures how much in earnings a company generates before interest, taxes, depreciation and amortization, as a percentage of revenue.
The last and final profitability measure I chose a screen for were companies with unlevered free cash flow (UFCF) greater than $500 million. Essentially, UFCF can help determine the cash generated from a company’s core activities. Companies that are able to generate high UFCFs have more discretionary cash that can be allocated to reinvestments in operations or to fund future growth strategies.
Finally, I filtered for names with a InvestingPro ‘Fair Value’ Upside Greater Than or Equal to 20%. The fair value estimate is determined according to various valuation models, including price-to-earnings ratios, price-to-sales ratios, and price-to-book multiples.
And those companies with a market capitalization of $5 billion and more made my watch list.
Once the criteria were applied, I was left with a total of just 12 companies.
Source: InvestingPro, Assets That Match Screen
Not surprisingly, 11 of them currently enjoying an InvestingPro ‘Financial Health’ score above 2.75. That’s important because companies with health scores greater than 2.75 have outperformed the broader market by a wide margin over the past 7 years.
h2 7 Undervalued Tech Gems to Buy Now:/h2
As such, these are the 7 most promising undervalued tech gems which are expected to deliver the highest returns in the coming months based on the InvestingPro models:
- Information about the company Skyworks Solutions currently applies Skyworks Solutions (SWKS. (Fair Value Upside: +41.1%)
- EPAM Systems (NYSE: EPAM) (Fair Value Upside: +37.5%)
- Cognizant (NASDAQ:CTSH) (Fair Value Upside: +33.5%)
- NetApp (NASDAQ:NTAP) (Fair Value Upside: +32.3%)
- Fortinet (NASDAQ:FTNT) (Fair Value Upside: +30.1%)
- Adobe (NASDAQ: ADBE) (Fair Value Upside: +29.3%)
- Cisco Systems (NASDAQ: CSCO) (Fair Value Upside: +27.2%)
Source: InvestingPro, Screener Summary
For the full list of the 12 technology gems that made my watchlist, start your free 7-day trial with InvestingPro now!
If you are already an InvestingPro subscriber, you can view my selections here.
disclosure: At the time of writing I am short on the S & P 500 and Nasdaq 100 via the ProShares Short S&P 500 ETF (SH) and ProShares Short QQQ ETF (PSQ). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and corporate financials.
The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.