A shorthand method that famous fund manager Peter Lynch liked to use to search for potential value opportunities was to look for stocks that were trading below what their price would be if they were to trade with a price-earnings ratio of 15 and/or their median historical price-earnings ratio.
Ever since he detailed this method in his book “Beating the Street,” value investors have been using it as a tool to find potential investment opportunities. GuruFocus has also built the “Peter Lynch chart” based on this method, which is included in the summary pages of stocks to provide a quick reference.
Thus, now that many quality tech stocks have gone on sale thanks to the bear market, I used the GuruFocus All-in-One Screener, a Premium feature, to screen the market for tech stocks that are undervalued according to their Peter Lynch charts despite having grown their top and bottom lines by an average of at least 10% per year over the past five years.
Among the screener results, three that stood out to me for having solid recovery and growth prospects were Jabil Inc. (JBL), HP Inc. (HPQ) and Taiwan Semiconductor Manufacturing Co Ltd (TSM).
Jabil Inc.
Jabil Inc. (JBL), a global manufacturing services company headquartered in Florida, was trading below both its Peter Lynch earnings line and its median historical valuation line as of this writing.
Over the past five years, the company has grown its revenue per share an average of 16.80% per year and its earnings per share by an average of 60.60% per year.
Jabil focuses on providing manufacturing solutions for businesses that are higher-margin as well as those that operate in areas with strong growth expectations, such as health care, electric vehicles and Cloud. It also has highly diversified revenue streams, operating in over 30 countries and serving 18 main industries from appliances to payment solutions, printing and more.
Diversification allows the company to perform well regardless of macroeconomic conditions, and a focus on profitable growth sectors has helped it grow its business over the long-term. This highly effective approach has earned the company a reputation as an industry leader, attracting more high-profile clients and serving as a competitive moat.
HP Inc.
California-based PC and printer giant HP Inc. (HPQ) was trading above its Peter Lynch earnings line but below its median historical valuation line on Friday.
Over the past five years, the company’s revenue per share growth has averaged 13.80% per year while its earnings per share growth has averaged 15.50% per year.
HP has been growing at a decent pace since it split from parent company Hewlett Packard Enterprise Co (HPE) in November of 2015. While Hewlett Packard got the parent company’s name, it was HP that inherited the majority of the business. HP consists of the PC, printing and 3D printing segments, while Hewlett-Packard is an information technology and Cloud company. The parent company hoped the split would unlock value by simplifying each child company’s operations and helping them focus on their areas of expertise to better keep up with growing competition.
This plan has worked quite well for HP. After all, it is still the second-largest PC vendor in the world with a 19.4% market share in 2022, according to Statista. The PC market may show some cyclical characteristics, and average annual demand has mostly reached a plateau in developed countries, but HP can still benefit from international expansion. The slowdown in demand for printed materials is undeniable, but HP has also expanded into 3D printing, which is a growth market – according to Grand View Research, the 3D printing market is expected to grow at a CAGR of 23.3% from 2023 to 2030.
Taiwan Semiconductor Manufacturing Co Ltd
The world’s top semiconductor foundry by a long shot, Taiwan Semiconductor Manufacturing Co Ltd (TSM), was trading below both its Peter Lynch earnings line and its median historical valuation line on March 24.
The company has grown its revenue per share by an average of 17.80% per year over the past five years, while its earnings per share growth has averaged 23% per year over the same timeframe.
In its fourth quarter 2022 earnings report, Taiwan Semiconductor recorded a 58.5% share in the global semiconductor foundry market, making it the top player by a long shot. Its process leadership, lower costs and other economies of scale give it enormous competitive advantages. Taiwan Semiconductor and Samsung Electronics (XKRX:005930) are the only companies in the world that can mass-produce 3nm chips, which is another advantage.
How did one company gain such an iron grip over the chip foundry market? The problem with this industry is that there are so many steps in chip production that even a small error or inefficiency in the process can drastically reduce the success rate of finished products. This has a compounding effect down the line and means that the company with the best process is able to create far more product at a much lower cost. Those worried about geopolitical risks may find it reassuring that the company has built a plant in Arizona, with production set to begin in 2024.
