A little over a decade ago, investors thronged to high-growth, seemingly unstoppable tech stocks. Most value investors, however, remained on the sidelines, waiting for the market to realize the over-valued pricing of the stocks. By the time the tech-heavy stock market crashed in 2000-2002, the stock market lost $5 trillion. But in recent years, a reversal is taking place – “old tech” stocks are beginning to appear in the portfolios of dyed-in-the-wool value investors, who believe they are a great deal, while being shunned by other investors. Tech stocks appearing frequently in guru portfolios are Intel (INTC, Financial), Cisco (CSCO, Financial), Microsoft (MSFT, Financial) and Dell (DELL, Financial).
Intel
In the first quarter of 2011, Donald Yacktman added only one new stock to his portfolio, Intel Corp. He bought 2,119,200 shares at $21.1 per share, and the stock has risen to $23.50 since then. During the dot-com bubble, Intel traded as high as $70 per share, before it came crashing down to the teens. The GuruFocus Fair Value Calculator gives Intel a fair value of $47.99.
In his quarterly letter, Donald Yacktman discussed this addition. Ten years ago, he said, stocks like Intel were overvalued, generating poor returns for shareholders even though the businesses produced profits. Now, he believes he is paying “fire sale” prices for good businesses.
“Today, this ‘old tech’ group is now so disliked it sells at less than ½ the multiple of the S&P 500 even though the companies in this group exhibit business characteristics that we believe are superior to the average company in the S&P 500. The ‘old tech’ balance sheets are some of the strongest around,” he says.
Since 2007, the actual tech businesses in his portfolio have outperformed the S&P 500, but the stocks have “dramatically underperformed.”
But will Intel’s business continue its stable results even with its ties to the consumer PC sector, which many believe will decline? Intel’s broader product offering is microchips, which are integral to computers but also mobile devices – an expanding sector. The company is continuing to innovate for the smartphone and tablet market, and there is no foreseeable end to the need for microchips in the direction technology is headed.
Intel’s strong financial results show that it just had its best year in ten years, with net income of $11.5 billion in 2010. It also had 24% earnings growth in the last 12 months, 3.2% in the last 5 years, and 7.4% in the last 10 years. Intel has a P/E ratio of 10.6, P/B ratio of 2.7, and P/S ratio of 2.9.
Cisco
Another stock from a company that survived and is now thriving after the tech bubble is information technology corporation Cisco.
Cisco is cheap compared to its book value. It is currently trading at $17.41, and has had consistently strong earnings. It rebounded from its tech bubble loss of $1 billion in 2001 to have only profitable years since then. In 2010 it had net income of $7.8 billion; it also has had average annual earnings growth of 17% in the last 12 months, 6.4% in the last 5 years, and 23% in the last 10 years. Cisco’s P/E ratio is 12.2, P/B ratio is 2.1 and P/S ratio is 2.4 – historic lows.
Cisco has a large gross profit margin which decreased approximately 4.3% over the last quarter, but from 2009-2010 it increased slightly from 63.90% to 64.0%.
In spite of its strong earnings, its stock price has not changed much. From a recent GuruFocus article: “Cisco continues to make new lows lately as the market anticipated continuous decline of Cisco’s profit margins. The stock is only 20% above its price at the market bottom of March 9, 2009.” Year to date, it is down 13.6% to $17.47. The GuruFocus Fair Value Calculator gives a fair value of $22.98.
Tweedy Brown & Co. explained the reasons for their position in Cisco: “Cisco is financially strong and we think statistically cheap. It has a dominant market position and has been growing within a category that we believe still has a lot of room for future growth. Perceived competitive threats and concerns about possible slower rates of growth have put pressure on Cisco’s stock price, which has allowed us an entry point in the stock that we believe is at roughly a one third discount from a conservative estimate of the company’s intrinsic value.”
Microsoft
Likewise, Microsoft is an enduring tech stock with a strong balance sheet and a stock price weighed down by public perception. It is hard to believe that such revolutionary technology as the personal computer could be on the wane, but the rise of hip handheld devices and tablets could cause this belief among investors. When Microsoft announced a dip in the sales of Windows & Windows Live Division, the stock fell 3% even though quarterly profits were strong.
In reality, global PC sales were up 13.6% year over year in 2010, and analysts have predicted that PC sales will grow 10.5% in 2011, numbers which do not suggest the demise of the personal computer is imminent.
Microsoft also has products that could help it to compete in a shifting world of technology. As GuruFocus writer Alex Morris notes, “The point is that the stock is priced for nothing to work; unlike growth stocks, which have every optimistic assumption for the next decade cooked into their stock price (take a peek at Salesforce.com (CRM)), Microsoft is priced as if Bing, Windows Phone, Kinect, Office 365, and many other business lines will never develop into a material addition to the company’s success; this may prove to be a grave miscalculation. Just some food for thought: Operating income in the Entertainment and Devices Division and the Server and Tools Division has increased 64% and 21%, respectively, through the first nine months of the year.”
Microsoft had ten-year record net income in 2010, at $18.8 billion, and P/E, P/B/ and P/S ratios of 10.5, 4.5 and 3.5 respectively. It currently trades at $25.81 per share. GuruFocus readers rate its fair value at $35.88, and the Fair Value Calculator gives a fair value of $43.59.
DELL
Dell has seen 60% earnings growth in the last 12 months, but only 4.2% over the last 10 years. In spite of strong earnings, its stock declined 39.5% over the last five years and increased a little over 1% in the last year. Dell exemplifies the need to understand the way a business works to estimate its true value. As deep value investor Mason Hawkins explained in an interview with GuruFocus:
“One misconception is that Dell is not a ‘high-return business,’ or that ROA needs to improve. We strongly disagree with that. Those returns I just talked about are way higher than at most companies.
The other interesting thing is that you actually just called it “Dell Computers,” which highlights why it is cheap. People still view it as desktop and notebooks, even though those are dying a slow death. Those represent probably a fourth of corporate value and a third of earnings.
The good segments – storage, servers, services, and software – account for the majority of value and an overwhelming percentage of future growth. Dell has its basis in computers, because computers created the free cash, which led to the 20,000-person distribution network, which is why they can now buy a storage company, widely distribute its products, and take revenues up in multiples…”
Dell’s gross profit margins increased from 17.5% in 2010 to 18.5% in 2011, putting back up to its 2004 and 2005 levels. Dell has a P/E ratio of 9.9, P/B ratio of 3.9 and P/S ratio of 0.5. It currently trades at $15.84 per share, GuruFocus readers rate its fair value at $19.85, and the Fair Value Calculator gives a fair value of $18.04.
Intel
In the first quarter of 2011, Donald Yacktman added only one new stock to his portfolio, Intel Corp. He bought 2,119,200 shares at $21.1 per share, and the stock has risen to $23.50 since then. During the dot-com bubble, Intel traded as high as $70 per share, before it came crashing down to the teens. The GuruFocus Fair Value Calculator gives Intel a fair value of $47.99.
In his quarterly letter, Donald Yacktman discussed this addition. Ten years ago, he said, stocks like Intel were overvalued, generating poor returns for shareholders even though the businesses produced profits. Now, he believes he is paying “fire sale” prices for good businesses.
“Today, this ‘old tech’ group is now so disliked it sells at less than ½ the multiple of the S&P 500 even though the companies in this group exhibit business characteristics that we believe are superior to the average company in the S&P 500. The ‘old tech’ balance sheets are some of the strongest around,” he says.
Since 2007, the actual tech businesses in his portfolio have outperformed the S&P 500, but the stocks have “dramatically underperformed.”
But will Intel’s business continue its stable results even with its ties to the consumer PC sector, which many believe will decline? Intel’s broader product offering is microchips, which are integral to computers but also mobile devices – an expanding sector. The company is continuing to innovate for the smartphone and tablet market, and there is no foreseeable end to the need for microchips in the direction technology is headed.
Intel’s strong financial results show that it just had its best year in ten years, with net income of $11.5 billion in 2010. It also had 24% earnings growth in the last 12 months, 3.2% in the last 5 years, and 7.4% in the last 10 years. Intel has a P/E ratio of 10.6, P/B ratio of 2.7, and P/S ratio of 2.9.
Cisco
Another stock from a company that survived and is now thriving after the tech bubble is information technology corporation Cisco.
Cisco is cheap compared to its book value. It is currently trading at $17.41, and has had consistently strong earnings. It rebounded from its tech bubble loss of $1 billion in 2001 to have only profitable years since then. In 2010 it had net income of $7.8 billion; it also has had average annual earnings growth of 17% in the last 12 months, 6.4% in the last 5 years, and 23% in the last 10 years. Cisco’s P/E ratio is 12.2, P/B ratio is 2.1 and P/S ratio is 2.4 – historic lows.
Cisco has a large gross profit margin which decreased approximately 4.3% over the last quarter, but from 2009-2010 it increased slightly from 63.90% to 64.0%.
In spite of its strong earnings, its stock price has not changed much. From a recent GuruFocus article: “Cisco continues to make new lows lately as the market anticipated continuous decline of Cisco’s profit margins. The stock is only 20% above its price at the market bottom of March 9, 2009.” Year to date, it is down 13.6% to $17.47. The GuruFocus Fair Value Calculator gives a fair value of $22.98.
Tweedy Brown & Co. explained the reasons for their position in Cisco: “Cisco is financially strong and we think statistically cheap. It has a dominant market position and has been growing within a category that we believe still has a lot of room for future growth. Perceived competitive threats and concerns about possible slower rates of growth have put pressure on Cisco’s stock price, which has allowed us an entry point in the stock that we believe is at roughly a one third discount from a conservative estimate of the company’s intrinsic value.”
Microsoft
Likewise, Microsoft is an enduring tech stock with a strong balance sheet and a stock price weighed down by public perception. It is hard to believe that such revolutionary technology as the personal computer could be on the wane, but the rise of hip handheld devices and tablets could cause this belief among investors. When Microsoft announced a dip in the sales of Windows & Windows Live Division, the stock fell 3% even though quarterly profits were strong.
In reality, global PC sales were up 13.6% year over year in 2010, and analysts have predicted that PC sales will grow 10.5% in 2011, numbers which do not suggest the demise of the personal computer is imminent.
Microsoft also has products that could help it to compete in a shifting world of technology. As GuruFocus writer Alex Morris notes, “The point is that the stock is priced for nothing to work; unlike growth stocks, which have every optimistic assumption for the next decade cooked into their stock price (take a peek at Salesforce.com (CRM)), Microsoft is priced as if Bing, Windows Phone, Kinect, Office 365, and many other business lines will never develop into a material addition to the company’s success; this may prove to be a grave miscalculation. Just some food for thought: Operating income in the Entertainment and Devices Division and the Server and Tools Division has increased 64% and 21%, respectively, through the first nine months of the year.”
Microsoft had ten-year record net income in 2010, at $18.8 billion, and P/E, P/B/ and P/S ratios of 10.5, 4.5 and 3.5 respectively. It currently trades at $25.81 per share. GuruFocus readers rate its fair value at $35.88, and the Fair Value Calculator gives a fair value of $43.59.
DELL
Dell has seen 60% earnings growth in the last 12 months, but only 4.2% over the last 10 years. In spite of strong earnings, its stock declined 39.5% over the last five years and increased a little over 1% in the last year. Dell exemplifies the need to understand the way a business works to estimate its true value. As deep value investor Mason Hawkins explained in an interview with GuruFocus:
“One misconception is that Dell is not a ‘high-return business,’ or that ROA needs to improve. We strongly disagree with that. Those returns I just talked about are way higher than at most companies.
The other interesting thing is that you actually just called it “Dell Computers,” which highlights why it is cheap. People still view it as desktop and notebooks, even though those are dying a slow death. Those represent probably a fourth of corporate value and a third of earnings.
The good segments – storage, servers, services, and software – account for the majority of value and an overwhelming percentage of future growth. Dell has its basis in computers, because computers created the free cash, which led to the 20,000-person distribution network, which is why they can now buy a storage company, widely distribute its products, and take revenues up in multiples…”
Dell’s gross profit margins increased from 17.5% in 2010 to 18.5% in 2011, putting back up to its 2004 and 2005 levels. Dell has a P/E ratio of 9.9, P/B ratio of 3.9 and P/S ratio of 0.5. It currently trades at $15.84 per share, GuruFocus readers rate its fair value at $19.85, and the Fair Value Calculator gives a fair value of $18.04.
