It hasn't been the best start of the quarter for investors in tech stocks. The sector, which has been an investor favorite most of the year, has had a bumpy first couple of weeks in October. Darlings such as Google (GOOG) and Apple (AAPL) have dropped more than 10% since the start of the month. Poor earnings and guidance from tech stalwarts Intel (INTC) and IBM (IBM) have undercut confidence in end demand, the impact of the migration to mobile devices and hurt sentiment on the sector overall.
But challenges bring opportunities. One of my favorite stocks to buy on pullbacks in the tech sector over the past few years has been EMC Corp. (EMC). My usual strategy is to sell slightly out of the money puts to collect premiums or get a lower entry for purchasing the stock. Usually this strategy has resulted in generating nice option income and, occasionally, I have been put the stock at a lower price and ridden it back up for a nice profit. I have executed this play a half dozen times over the last couple of years with solid success.
EMC has pulled back more than 10% since the start of the quarter and is now solidly in bargain territory. Like most of the tech sector, concerns around the stock center around tepid end demand. However, the company's two major product lines should hold up better than the rest of the industry. EMC owns 80% of VMware (VMW), the leader in virtualization software. This stake accounts for just under 60% of EMC's total market capitalization. Revenue growth here is marching along at a 20% annual clip and the company consistently beats quarterly earnings estimates as well. EMC itself offers enterprise storage systems and software. Each year, the amount of data created that needs to be analyzed grows exponentially. EMC provides solutions to meet this growing need -- a good place to be. Although not growing as fast as the virtualization business, EMC should manage 10% sales increases in 2012 and 2013. In addition to its insulated product-line demand, EMC looks like a buy for a variety of other reasons as well.
Four more reasons to buy EMC at under $25:
- In addition to its roughly $28 billion stake in VMW, EMC also has approximately $4 billion in net cash on its balance sheet.
- Analysts view the stock favorably at these levels. The median price target by the 34 analysts that cover the stock is just under $32 a share. Standard & Poor's gives the stock its highest rating, Strong Buy, and a $36 price target.
- Consensus earnings estimates for both 2012 and 2013 have been rock-steady over the last three months, despite concerns and earnings revisions throughout the tech sector.
- The stock is priced at a five-year projected price/earnings/growth ratio of 1.01 and sells at 12.5x forward earnings, a discount to its five-year average of 16.5.