Jeff Auxier Explains Why He Dislikes Tech But Owns Tech Stocks

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Jul 27, 2012
Jeff Auxier, manager at Auxier Asset Management, spoke with GuruFocus this morning about topics ranging from emerging markets and the European crisis, to his individual investments. One sector Auxier said he disliked is technology.


“In 1983 we had 30 to 40 new IPOs in personal computers alone,” he says, “and now we’re down to one and a half or whatever. In technology it’s really tough to determine supply and demand. The big thing in a value trap is supply and demand.”


Conflictingly, he still has positions in the sector.


Auxier actually owns 11 technology stocks, but most of the positions are quite small. For instance, he bought two new ones in the second quarter – Qualcomm (QCOM, Financial) and Corning Inc. (GLW, Financial) – which make up just 0.077% and 0.18% of his portfolio, respectively.


Other positions are larger. Microsoft, for instance, is 2.6% of his portfolio. He owns 251,605 shares of the company, in a position he initiated with 159,322 shares in the fourth quarter of 2010 at an average price of $26. On Friday the company is trading for $30 per share.


Intel makes up his second-largest tech holding at 0.84% of his portfolio. He initiated the position in the same quarter he bought Microsoft, at an average price of $21 per share. After subsequent additions he owns 93,294 shares total and the stock trades for $26 on Friday.


Auxier said he does not have the positions because they have somehow managed to avoid the pitfalls of other technology companies. Rather, he thinks they are cheap cash.


“We have Microsoft and Intel more because of a price value cash arbitrage,” he says. “It’s not for any insight into the industry. They have a couple businesses that generate pretty consistent cash, and you’re buying cash pretty cheap.”


Over the last decade, Microsoft has generated more than $10 billion in cash annually, escalating to a record $25.6 billion in 2011. The company also has almost $60 billion in cash on its balance sheet. With an average annual EBITDA growth rate of 12.9%, the company still trades for a P/E of 10.8.


Similarly, Intel has been generating growing cash flow in the billions of dollars over the last decade, with $10.2 billion in 2011, its second-highest level. It has $17.8 billion in cash and a 10-year annual EBITDA growth rate of 12.7%. Its P/E ratio is 10.8.


Though revenue was up in the second quarter overall, with an 8% increase in Europe and 1% increase in Asia-Pacific, and 6% decrease in the Americas and 1% decrease in Japan. Intel also warned of weakening growth going into its third quarter due to the macroeconomic environment reducing the sales of personal computers. The company is hoping new product introductions will bring in added revenue. It will begin selling its Ultrabook and other Intel-based tablet and phone products in the second half of the year.


Auxier is also not a fan of Buffett’s recent IBM (IBM, Financial) purchase. “This IBM purchase with Buffett – I don’t get it. They make over 70 acquisitions and I don’t trust their accounting, so I’m just kind of surprised,” he says.


Buffett accumulated 64,395,700 shares of Microsoft over the quarters from the first quarter of 2011 to the first of 2012, or 5.58% of shares outstanding.


Buffett explained several of his primary reasons for choosing the company in an interview with CNBC: “I don't think there's any company that's—that I can think of, big company, that's done a better job of laying out where they're going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they've laid out another road map for 2015. They've done an incredible job. First, Lou Gerstner, when he came in, he saved the company from bankruptcy. I read his book a second time, actually, after I read the annual report. You know, "Who Said Elephants Can't Dance?" I read it when it first came out and then I went back and reread it. And then we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things.”


IBM has been generating cash over $10 billion annually for most of the decade, but has far less cash on its balance sheet than Intel or Microsoft – about $14 billion. Its P/E is 13.5.


Auxier also cites the example of Nokia (NOK, Financial). He bought the stock when it was an industrial rather than phone company for about $2 per share. When it went up to $50 per share, he sold half his holding, then sold half of the rest when it dropped to $40. The rest he sold for around $30. Now the stock is back under $2.


“And look at Nokia in their position in phones – you look at Samsung (SSNHY, Financial) and Apple (AAPL, Financial), you look at the competition and supply. The value traps to me – you have to look at the industry. We want a fixable problem,” he says.


See Auxier’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Jeff Auxier.