Here is a question. Name a company that is a near monopoly in its sector, a sector that is on the cutting edge of technology, it spends the most amount of money in R&D of nearly any company on the planet, employs nothing but the best of brains and is often considered a model employer. If you thought Apple or Google or Lululemon, I don’t blame you as they are the names grabbing all the headlines and investor dollars these days and once more you just drove down that linear thinking highway. To top that, the company is actually trading at price earnings ratio of low double or high single digits. If analysts’ forecast comes true next year, then it is trading at a low P/E of 10, a level which used to be reserved for utilities and banks.
But the company I am actually thinking of is not a bank or a pipeline (which by the way trade at considerably higher multiples of P/E) but it is the leading high technology company called Intel Corporation (INTC, Nasdaq). You can’t call INTC a “has-been” microprocessor company as even today, PC’s intelligent hearts belong to this company. Curiously in the bin of lost of found stocks, Intel is not alone. Nearly all semiconductor big wigs are trading close to ten P/E. And it is not just technology companies, there is the entire drug sector which can’t find any respect and as we saw in my last article, they are practically given away the telecoms with a handsome dowry in the form of dividends to boot.
What is going on here? It seems that the split between growth and value stocks and investment strategy we learned in the eighties and nineties were actually a delusion, based on too simple a math. Coined by the famous Peter Lynch, PEG ratio (defined as growth rate divided by PE ratio) has now become the meat and potato ratio; every one talks of it and uses it to decide what value to assign a stock. Corporate finance did not have that in mind. Just because a company is likely to increase its profits from a very small base today to twice the number next year, it shouldn’t qualify as a growth stock. The trick is to keep doing that over and over and convince the street that it is going to be so.
And that is what went wrong. Yesterday’s growth companies just can’t deliver consistent increase in profits. The days when you turned your $10,000 investment in Dell to over a million in less than a decade are gone. In fact if you don’t watch it you will give back most of that million if you stick around too long. The story can be repeated for GE, Microsoft and Pfizer to name just a few.
So what is an investor to do? We could chase after the new PEG ratio titans to recreate the old magic. It is the search engine Google that will deliver the elixir or is it the fancy iPhone maker Apple. No, it is the make-my-butt-look-good (that’s how a customer described why she liked LuLu’s slacks) yoga pants maker LuLulemon Athletica. Go ahead but be prepared for heartache for the magic that was high tech of the nineties or free money by selling drugs legally is really gone for some time. It may come back but it is unlikely to be a retailer or a pipeline company. No, you have to expect and accept less.
And with that dose of reality check let me suggest that Intel, which even today is a near monopoly in microprocessors, the little chips that now drive everything from your calculator to spaceship, is still an awesome company and even a decent stock to grow old with. Would you believe that the dividend is now 2.79%, better than five year bonds? Intel Corporation makes markets and sells integrated circuits for computing and communications industries worldwide. If you want further details on what they make (or perhaps what they do not make), check out their website. If it is an intelligent electronic device, Intel has most likely got the largest share.
What it seems to be lacking is a niche product, a novelty and a fast grower like Apple’s innards. But history may be about to repeat itself. Years ago, Apple invented the small computer market and then lost it Intel Corp. (and IBM and Microsoft), whose chips run about 80 percent of the world’s PCs. Apple’s new innovation with iPhone and iPad has again moved other manufacturers to come up with similar devices like smart phones and tablet computers to compete with them. And again the new products will be open, i.e. any one can build it and make it cheaper. At the heart of this move is Intel.
Products of note to compete with Apple are many. For example, Dell has Latitude tablets based on Microsoft Windows, claims to provide a flexible and intuitive tablet-PC computing experience. Dell will begin selling a combination smart phone and tablet with a 5-inch (13-centimeter) screen in the
Micro-Star is developing a tablet that uses Atom, an Intel processor originally designed for low-cost net books. Unfortunately it has less power than the iPad, Asustek Computer Inc., the Taipei-based maker of Eee PCs, has a Windows 7 tablet with an Intel dual-core chip. It can run for six hours. Still, that’s about half the 10 hours offered by the iPad.
Intel plans to improve battery life by releasing a dual- core version of Atom for tablets early next year. It will use half the power while offering enough processing to provide smooth video and fast Web surfing.
One roadblock is actually Microsoft which is so entrenched in Windows; they seem to be missing these larger opportunities. But if the PC versus Apple McIntosh war or a new TV system almost every Christmas taught us anything, it is that cheap tech products end up being adapted by the consumer en mass. Will it happen again is uncertain but that is why you are getting Intel at a forward P/E for ten, nearly half that of Apple.
Of course, before investing in a stock these days you have to check with Shamans and Tarot card readers also known as seasonal investors. You know the ones who told you to sell in May and go away while you missed nearly a double in 2009 or waited for a Santa Claus rally that never came. Well the fortune tellers’ take on technology is that you don’t buy tech in the summer, a bad time. I say you follow a Hindu priest’s ritual and eat some yogurt before taking the plunge. Apparently that wards off any evil spirits for at least a day or until your project is done.
