Today, one of the best places for value investors is technology. This comes as the share prices of some dot-com-era companies are still below where they were during the boom.

While their price-to-earnings (P/E) multiples were in the stratosphere back in 1999, they’re now in the value bin. Some of these durable companies are even trading at P/E's below that of the S&P 500.

This means there's an opportunity for sophisticated investors to buy some great bargains. Although their share prices might have not climbed much in the past 10 years, their businesses have continued to grow. Today, with their steady businesses, these former high-fliers can almost be considered blue-chip stocks.

One company that fits this mold is EMC Corp. (NYSE:EMC). At the height of the dot-com bubble, EMC traded at nearly $100 a share. Today, shares trade near $29, a good 70% off the company's all-time highs. (It is up 8%, however, since my colleague Joseph Hogue profiled EMC this spring.)

EMC is more profitable now than ever, with earnings before interest, taxes, depreciation and amortization (EBITDA) of $5.4 billion last year on revenue of $23.6 billion. Shares are trading at just 13 times next year’s earnings. It’s also in a solid financial position with over $2 billion in net cash (cash less debt) on the balance sheet.

One investor that has noticed this is Elliott Management’s Paul Singer. His firm has amassed over a $1 billion stake in the company, putting it as the fifth largest shareholder. Singer wants to see EMC split up and launch an aggressive share buyback program to boost shareholder value.

Most notably, he wants EMC to spin off VMware (NYSE:VMW), which accounts for just under 20% of EMC’s revenues, thanks to its 80% equity stake in VMware. VMware is a leader in virtualization services, but it's starting to compete with EMC in certain parts of the market.

If EMC is successful with a spin-off, Singer thinks a bidder could emerge to buy what’s left of EMC. Cisco Systems (Nasdaq:CSCO) and Oracle (NYSE:ORCL) are just a couple companies that have shown interest, according to Singer.

And Elliott is no stranger to battles with tech companies. Some of his notable campaigns in the past have included Juniper Networks (NYSE:JNPR), Emulex (NYSE:ELX) and BMC Software (Nasdaq:BMC).

Even after a recent jump, EMC has underperformed the Nasdaq Composite Index over the past few years:

But the beauty of EMC is that you don’t need the breakup to get rewarded. When asked whether EMC would ever spin off VMware, current CEO Joseph Tucci said, “Never.”

EMC is a leader in the external disk industry: Research firm IDC puts its market share at 30%, beating out the likes of NetApp (Nasdaq:NTAP) and IBM (NYSE:IBM). The key to EMC’s growth is focusing on providing hardware and services for infrastructure that enables cloud computing.

Public IT cloud service spending is expected to grow to over $107 billion by 2017, according to IDC. That would represent annualized growth of 23% since 2013.

EMC is also a cash flow machine, having raked in over $5 billion in free cash over the past 12 months. That’s up from the $2.6 billion it generated in 2009. It plans on spending upwards of $2 billion on share buybacks in 2014.

EMC increased its dividend by 10% earlier this year and now offers a 1.7% dividend yield. With a very strong balance sheet, EMC could also issue debt to raise money while rates are low and buy back even more shares. That's something Paul Singer will likely push for.

Risk to Consider: EMC could push back against Singer and Elliott Management. Although the activist has a $1 billion stake, that represents only 2% of the company. A similar breakup campaign by Elliott at Juniper Networks has been unsuccessful. If a spin-off of VMware looks unlikely, there could be a pullback in EMC’s stock.

Action to Take --> Invest in EMC alongside Singer. He’s very resilient. The company owns the hard disk storage market and is a big player in the fast-growing cloud computing market. Couple that with a rebound in IT spending, ability to lever its balance sheet, and a potential VMware spin-off, and shares could hit $38 in short order.

P.S. -- Hands down, it's the single best way to beat the market with dividend stocks like EMC. After months of research, my colleague Nathan Slaughter has proved that investing in dividend-paying companies that pay down debt and pay "tax-free dividends" helped shelter investors from even the worst downturns. Not only has the strategy returned an average of 15% per year since 1982, but it's outperformed the S&P during the dot-com bubble and the 2008 financial collapse too. To learn more about his "Total Yield" investing strategy, click here.

]]>

Related Articles
  1. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  2. Markets

    Apple's Endgame in Giving Schools Free Stuff

    Technology has the potential to rebuild the future and the fortunes of businesses. Apple Inc. seems to have realized it.
  3. Investing Basics

    Bill Ackman's 2 Best Investments (GGP, CP)

    Learn about the two best investments Ackman ever made. Ackman has demonstrated a consistent track record of success in all types of market environments.
  4. Investing Basics

    4 Things That Make a Stock a Safe Bet

    No investment is a sure bet, but you can reduce your chances of taking a loss by choosing fair-priced stocks with growth potential and low volatility.
  5. Investing

    George Soros: 3 Best Investments Ever

    Learn about some of the most successful trades famed investor George Soros has made during his career, including a billion dollar profit against the pound.
  6. Investing Basics

    The Complete Guide to Financing an Investment Property

    If you're considering adding an investment property to your portfolio, you need to know what your options are for financing its purchase.
  7. Investing Basics

    A Beginner's Guide to Investing in Company Stock Plans

    There are certain advantages to investing in your employer's stock but there are some potential drawbacks to be aware of.
  8. Stock Analysis

    The Top 4 Companies Owned By Sony (SNE, ERIC)

    Learn how Sony Corporation became a leader entertainment. Music acts such as Beyoncé and movies such as "Spider-Man" are part of Sony's success story.
  9. Investing News

    3 Amazon Business Segments to Watch in 2016

    We'll look at three divisions of Amazon that are likely to perform well in 2016.
  10. Retirement

    Smart Ways to Tap Your Retirement Portfolio

    A rundown of strategies, from what to liquidate first to how much to withdraw, along with their tax consquences.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  3. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  5. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  6. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center