Morningstar Advisor - August/September 2011 - (Page 66)

Screens More Bargain Than Bubble By David Hirsch Use this screen to find undervalued tech companies poised to generate significant returns on their competitive advantages. 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 wellestablished tech companies with formidable growth strategies. These companies are all industry leaders offering attractive margins of safety for investors. We initiate the screen by narrowing it to technology companies. The Morningstar coverage universe extends to both foreign and domestic firms. And ( Economic Moat Or Economic Moat 5 Narrow 5 Wide ) In order to identify undervalued stocks, we focus on companies that are trading at severe discounts to Morningstar analysts’ fair value estimates. We believe the market has significantly underestimated these companies’ earnings potential and these equities will eventually converge to a much higher valuation. 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 Forward PE Ratio , 10 Sector 5 Technology And Morningstar Rating Overall . 4 To ensure we are not victim to a perceived bubble, we have selected companies that are currently priced at less than 10 times their expected future earnings. Even if these companies miss estimates, their trading multiple will still likely be less than the industry standard. 66 Morningstar Advisor August/September 2011

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011

Morningstar Advisor - August/September 2011
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Small-Cap/Large-Cap Flip-Flop?
Four Picks for the Present
Investment Briefs
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?

Morningstar Advisor - August/September 2011