The One Tech Stock to Own

10/15/2009 1:00 pm EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, commentator for MSN Money, says a superstar technology company from the 1990s is ready to post solid returns for even conservative investors looking for a good value.

[A well-known technology] company’s shares may be the one stock conservative investors need to own for the next few years. Its value is already so bombed-out that everyone who wanted to sell it has fled, and now it's owned mostly by new investors who are ready to dream again about how great it can be.

The company is data-storage specialist EMC (NYSE: EMC). During the 1990s, which I believe we are about to repeat, EMC shares put in one of the greatest advances in market history. The stock rose 65,450% from January 1990 to December 1999.

[But] new competitors crowded into its space with lower-cost offerings, and the ensuing price war crushed its profit margins. EMC, which was always known to have one of the best sales forces on the planet, managed to annihilate those latecomers with brusque dispatch, but the damage was done.

So, EMC shares [have fallen] 80% since the start of this decade. At the stock's peak, investors were willing to pay a super-high price/earnings multiple of 125x. But in the multiyear collapse, the P/E multiple hit 10x in February. It's now around 18x, based on my estimate of next year's earnings. That is very cheap for a company of this caliber with potential to grow 20%.

[And] expectations are still fairly low: Most analysts expect the company to earn 84 cents a share next year, which would amount to fantastic 32% growth over 2009. But I think that's too low and the company has a very good shot at earning $1.10 a share next year.

Its elite roster of Fortune 100 customers with stiff data-storage needs will allow it to report better-than-expected [quarterly] results October 22nd. And reports also suggest that the current quarter has already started with a bang, as customers are finally loosening budgets that were severely tightened during the recession. 

EMC has used the recent fallow period to become the leader in a niche called network-attached storage, with 36% market share—but five percentage points more than its top competitor, according to calculations from analysts at Broadpoint AmTech.

And EMC has retained a large stake in VMware (NYSE: VMW), a spun-off unit that sells the hottest infrastructure enhancement today: virtualization software, [which] allows [companies] to get more computing power for less money. VMware is virtually the only company Fortune 100 companies use for this service, and EMC owns 83% of it.

This is not going to rocket 100% a year over the next couple of years. But [it] can still grow 15% to 20% a year and has the potential to see its price-earnings multiple expand by 5% a year, because the need for storage is the only thing in technology that is truly growing exponentially.

Figure that EMC, now trading around $18 a share, can get back to about $35 over the next three years with any kind of tailwind from the improving global economy back to where it traded in 2001.

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