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More Bargain Than Bubble

Use this screen to find undervalued tech companies poised to generate significant returns on their competitive advantages.

David Hirsch, 09/13/2011

This article first appeared in theĀ August/September 2011 issue of Morningstar Advisor magazine. Get your free subscription today!

With the recent sizzling IPOs of LinkedIn LNKD and Yandex YNDX, as well as the highly anticipated offerings of Groupon and Facebook, many investors have begun to worry about the possibility of another bubble in the technology sector.

While they may have a point in questioning the rationale behind companies facing near-term loss projections trading at around 1,000 times earnings, this fear has also caused the market to shy away from well-established tech companies with formidable growth strategies. These companies are all industry leaders offering attractive margins of safety for investors.

Sector = Technology

We initiate the screen by narrowing it to technology companies. The Morningstar coverage universe extends to both foreign and domestic firms.

And Economic Moat = Narrow
Or Economic Moat = Wide

Because the technology sector is extremely competitive, these criteria focus on companies with already-defined economic moats. Having competitive advantages provides a degree of certainty in the company's ability to generate returns on investment above its cost of capital in a constantly changing environment.

And Morningstar Rating Overall > 4

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