Market sectors go through cycles just like the overall market. Investors who can learn to cast aside popular negative sentiment and buy world class businesses when they are on sale will find themselves compiling safe, steady gains over multi-year periods without the angst and anguish suffered by many people with less carefully selected positions.
Pictured: Apple Inc. (NASDAQ:AAPL)’s Tim Cook
It’s Time to Be Greedy in Big Technology
Warren Buffett once said that investors should be fearful when others are greedy and greedy when others are fearful. Based on the current valuations of four enormously successful technology businesses, many investors appear to be fearful; so, now is the time shrewd investors should become greedy. Ten years from now, many who are fearful today will be looking back and wishing they had taken Mr. Buffett’s advice.
Today, many value investors who never previously considered owning technology related businesses due to high valuations are buying them as prices have fallen declined to very attractive levels. Does anyone really believe that technology giants Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), Cisco Systems, Inc. (NASDAQ:CSCO) and Intel Corporation (NASDAQ:INTC) have suddenly become so poorly run that they deserve valuations equal to only about 50% of the market average based on common valuation metrics? If you don’t then you must believe these businesses are priced based upon irrational fear and present an exceptional opportunity.
With the S&P currently priced at around 18 times 2013 projected earnings and a 15.8 times cash flow, it would seem reasonable to assign a similar valuation to any large, well run business that has moved beyond its fast growth years but remains enormously successful today. Let’s take a quick look at how these four stack up and what we should expect as the market corrects the current error in valuations.
The King of Business Software
Microsoft Corporation (NASDAQ:MSFT)’s main software products, Windows and Office, dominate the business world. They are also a lot like Rambo and Rocky movies in that you can bet a new version will be out soon and a lot of people will buy it. After all, if you are running a business, you have to have software compatible with that being used by your customers.
Microsoft Corporation (NASDAQ:MSFT) stock would have to rise 80% to trade at a price to earnings multiple equal to the S&P, 60% to match the market dividend yield of 1.99% and 23.4% to trade at the same price to cash flow multiple. Add the fact that Microsoft has cash, short-term investments and receivables equal to slightly more than 34% of its total market capitalization and this is one enormous value.
The Former King of Cool
Apple Inc. (NASDAQ:AAPL) has almost certainly lost its status as the only maker of a mobile device that one must hold in one’s hand in order to be cool. Attempting to regain that lofty status will, in all likelihood be as difficult as returning the proverbial genie back in the bottle. Apple might well have victimized itself by introducing new products at such a rapid pace that it failed to deliver the significant improvements required with each new model to justify the substantial expense involved for consumers to upgrade.
Apple Inc. (NASDAQ:AAPL)’s miscalculation and the market’s overreaction to it have created an enormous opportunity for those who fail to be intimidated by the fear that is pervasive in the market today regarding Apple’ stock. Apple may have stumbled a bit but nothing that justifies a 35% drop.
Apple Inc. (NASDAQ:AAPL)’s share price and would have to nearly double for the price to earnings and price to cash flow multiples to equal that of the S&P 500 average today. With a dividend yield 25% higher than the market, Apple might not be the only maker of “must have” handheld mobile devices any longer, but it is not going away quietly and is grossly undervalued at the current price.
A New Chip Off an Old Block