I've been watching the twitter updates from the Value Investing Congress being held today.
One interesting presentation came from Lee Ainslie of Maverick Capital. Ainslie runs about $10 billion of capital and previously worked for Julian Robertson of Tiger Management.
He speculated that the founder of Dell might take the entire company private given its very low cash flow yield.
He further foused on other large high quality tech companies that generate a lot of cash and are putting that cash to work through buybacks, dividends and intelligent acquisitions.
The companies that he focused on were
Adobe (ADBE), Cisco (CSCO), CommScope (CTV), Hewlett-Packard (HPQ), Intel (INT), IBM (IBM), Marvell Technology (MRVL) and of course the darling of the value investor these days Microsoft (MSFT).
Ainslie mentioned that his firm currently has a net long 17% exposure to tech stocks which is the largest ever. He believes that the sector is cheap and that the market is assigning virtually no extra value to high-quality, high-growth companies.
Ainslie's message isn't unique. I've documented a virtual who's who of great investing minds over the past couple of months who are pounding the table on large cap quality.
http://www.gurufocus.com/news.php?id=108577
Ainslie believes that eventually the market will return to paying a premium for companies with strong balance sheets, high returns on equity and solid earnings growth.
The Maverick manager highlighted ten tech stocks including Adobe, Cisco and Dell, with CommScope as his top pick. This group is down 13% on average so far this year.
“Maverick has important holdings in this group,” Ainslie said, with lots of cash that’s earning nothing. “It’s very important to try to make sure these companies are using cash in a way that’s productive for the shareholder,” citing buybacks, dividends and smart acquisitions as examples.
“Mostly that’s happening,” he added. So far this year, one-third of all buyback activity has come from tech companies, while the sector makes up about one-sixth of the stock market, Ainslie calculated.
These tech companies are also generating a lot of new cash to add to their hoards. The average free cash-flow yield of this group of 10 tech stocks is 9%, according to the manager.
Meanwhile, corporate-bond yields are very low. In fact, equity free cash-flow yield is higher than corporate-bond yields for the first time since 1957, Ainslie noted.
This arbitrage between free cash-flow yield on tech stocks and yields on corporate bonds is too good to ignore,” he said
It is a common message. Buy high quality large equities, avoid bonds.
