7 Undervalued Tech Stocks for Smart Investors to Consider Using the Piotroski F-Score

With groundbreaking innovations emerging in burgeoning sectors such as artificial intelligence and cloud computing, investors have a fertile landscape for investments in technology-oriented enterprises. However, tech stocks that routinely generate headlines tend to be overheated as they attract the masses. Nevertheless, astute investors can focus on the path least traveled for compelling undervalued tech stocks.

By targeting lesser-appreciated market ideas, investors may enjoy greater upside potential as they may be entering the opportunity at an earlier stage. In addition, securities that already command intense bullish interest may fade out as early bird participants seek fresh prospects.

The fundamental task in investing is finding mispricings in price versus quality. There are a lot of cheap companies in the market, but most of them are cheap for very good reasons.

At the same time, potential investors must recognize that no guarantees in the market exist. Still, odds of success may be improved by avoiding overbought enterprises.

On that note, we’ve selected seven undervalued tech stocks for smart investors to consider, using a lens of the stock’s Piotroski F-Score, a recent addition to Fintel’s roster of quant and scoring dashboards. The scoring methodology was first outlined in Joseph Piotroski’s 2000-published paper titled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” The paper described a method of using data from a company’s financial reports to help predict future performance.

The 9-point discrete score, where 9 is the best, that ranks companies based on a number of financial factors. To calculate the score, we compare nine factors from the two most recent annual reports. If the change in the factor is “good”, then we add one to the score. If the change in the factor is “not good”, then we add zero.

ST Microelectronics (STM)

Switzerland-base ST Microelectronics (US:STM) designs, develops, manufactures and markets products which offer discrete and standard commodity components, application-specific integrated circuits, full custom devices and semi-custom devices for analog, digital and mixed-signal applications. On a year-to-date basis through the close of the May 26 session, STM gained nearly 25% of equity value.

At time of writing, the market prices STM at a trailing multiple of 8.60x. Using data compiled by the NYU Stern School of Business, the semiconductor equipment sector features a price-earnings ratio of 20.07.

Notably, ST Microelectronics has a Piotroski F-Score of 8. Recall, a score of 9 represents the best ranking. Specifically, ST nets a high rating based on positive net income, a return on asset of 28% and cash flow from operations (CFFO) that hit $5.954 billion. Also, the company benefits from strong earnings quality.

Diodes (DIOD)

A chip-manufacturing specialist, Diodes (US:DIOD) delivers high-quality semiconductor products to the world’s leading companies in the consumer electronics, computing, communications, industrial and automotive markets. Further, the company leverages its expanded product portfolio of discrete, analog, and mixed-signal products and leading-edge packaging technology to meet customers’ needs. Since the beginning of this year, DIOD rocketed higher to the tune of nearly 26%.

Over the trailing one-year period, the security gained over 24% and in the last five years, almost 177%. Still, Diodes offers an enticing discount for astute investors of undervalued tech stocks. Again, the semiconductor industry’s trailing PE ratio clocks in at 29.66 times. However, the market prices DIOD at a trailing multiple of only 13.29.

Financially, DIOD makes an attractive case for undervalued tech stocks in that its Piotroski F-Score comes in at 7. Notably, Diodes’ net income tips the scales at $329.74 million. Its ROA also stands at a respectable 15%. Moreover, Fintel states that the semiconductor firm posted an increase in liquidity, adding to its solid F-Score rating.

Kulicke & Soffa Industries (KLIC)

Arguably one of the most overlooked names among undervalued tech stocks, Singapore’s Kulicke & Soffa Industries (US:KLIC) is the quintessential “background” player. While it might not be a household name, Kulicke’s semiconductor, LED and electronic assembly solutions undergird multiple economic sectors, including automotive, consumer, communications, computing and industrial. At time of writing, the company commands a market cap of just over $3 billion.

Since the January opener, KLIC popped up more than 25%. However, on a trailing-year basis, it’s half-a-percent below parity, potentially offering plenty of room to run higher. Per Fintel, KLIC trades at a trailing multiple of 14.28x. However, the semiconductor sector’s trailing-year PE ratio comes in at 20.07.

Moving over to the Piotroski F-Score, Kulicke posts a respectable rating of 7. As with the other undervalued tech stocks, the company benefits from positive net income ($213.57 million), solid ROA (14%), robust CFO ($308.1 million) and high earnings quality. Also, Kulicke posted an increase in liquidity, helping its F-Score.

Vishay Intertechnology (VSH)

Headquartered in Malvern, Pennsylvania, Vishay Intertechnology (US:VSH) represents one of the world’s largest portfolios of discrete semiconductors and passive electronic components. Per its public profile, these components are essential to innovative designs in the automotive, industrial, computing, consumer, telecommunications, military, aerospace and medical markets. At the moment, VSH carries a market capitalization of $3.7 billion. Since the January opener, VSH popped up over 23%.

In the past 365 days, shares managed to return stakeholders nearly 30% of equity value. Despite a strong surge since the May 9 session this year, VSH compellingly rates as one of the undervalued tech stocks to consider. Right now, VSH trades hands at a trailing multiple of 8.48x. Again, that’s well below the semiconductor sector’s average PE ratio of 29.66. Even compared to the semiconductor equipment industry’s PE of 20.07, VSH is still priced at a discount.

Finally, Vishay’s Piotroski F-Score prints a solid 7. Most conspicuously, the company earns high marks for positive net income ($437 million) and a decent ROA of 12%. As well, it features positive cash flow from operations and high earnings quality.

Cognizant (CTSH)

One of the world’s leading professional services companies, Cognizant (US:CTSH) aims at transforming its clients’ business, operating and technology models for the digital era. According to its public profile, Cognizant’s unique industry-based, consultative approach helps clients envision, build and run more innovative and efficient businesses. Since the beginning of this year, CTSH stock has gained more than 9% of equity value.

Nevertheless, in the trailing 12-month period, CTSH slipped almost 16%, making it a relative discount among undervalued tech stocks. At the moment, the market prices CTSH stock at a trailing multiple of 13.83x. In sharp contrast, the software (system and application) sector’s PE ratio stands at 103.74. Even relative to the software (internet) sector’s trailing PE ratio of 28.70, CTSH still offers great value.

However, one factor to watch out for is Cognizant’s Piotroski F-Score of 6. While decent, it’s not the highest grade possible. That said, the company rates highly for its positive net income, measuring $2.307 billion, and an ROA of 13%.

Skyworks Solutions (SWKS)

Focused on empowering the wireless networking revolution, Skyworks Solutions (US:SWKS) features highly innovative analog semiconductors which connect people, places and things. Moreover, the company’s applications and relevancies command a massive footprint encompassing aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. Since the start of the year, SWKS gained 16% of market value.

Still, it trades at a relative discount. In the past 365 days, SWKS slipped 3.51%. Over the trailing 60 months, shares returned only a hair above 4%. Fundamentally, the market prices SKWS at a trailing multiple of 15.04. In contrast, the semiconductor industry’s trailing PE ratio stands at a much loftier 29.66 times. Per Fintel, Skyworks carries a high proprietary quality score of 81.59 (out of 100).

As with Cognizant above, Skyworks garners a Piotroski F-Score of 6, which again is decent. Aside from the company’s positive net income and an ROA that runs in the black, its CFFO pings at $1.635 billion. In addition, the semiconductor specialist enjoys high earnings quality.

Silicom (SILC)

A higher-risk, higher-reward opportunity among undervalued tech stocks, Israel-based Silicom (US:SILC) is an industry-leading provider of high-performance networking and data infrastructure solutions. Primarily focused on improving performance and efficiency in cloud and data center environments, Silicom’s solutions increase throughput, decrease latency and boost the performance of servers and networking appliances. Although it had some trouble earlier this year, in the trailing five sessions, Nasdaq-traded SILC popped up nearly 3%.

Fundamentally, much of the enthusiasm centers on the value proposition. At the current juncture, the market prices SILC at a trailing multiple of 12.27. In contrast, the telecommunications equipment sector’s trailing PE stands at a towering 36.73 times.

Now, one area worth investigating more closely is Silicom’s Piotroski F-Score. With a rating of 4, it’s not the highest forecast of future performance predictability. Still, it generates solid data for positive net income ($19.67 million) and an ROA of 9%. For those that want to swing for the fences with an enticing tech play, SILC could be a viable ticket.

This article originally appeared on Fintel

By Joshua Enomoto