Use this screen to find undervalued tech companies poised to generate significant returns on their competitive advantages.
This article first appeared in the August/September 2011 issue of Morningstar Advisor magazine. Get your free subscription today!
With the recent sizzling IPOs of LinkedIn
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