After you strip out cash, most of these names trade at forward P/Es in the single digits. For example, Apple Inc. (NASDAQ:AAPL)’s stock market value is about $400 billion… If you subtract $137 billion in cash to value Apple Inc. (NASDAQ:AAPL)’s business, it trades for just 5.7 times future earnings… That’s dirt- cheap. And these companies aren’t just cheap on a future earnings basis. Their price-to-sales ratio is at extreme lows as well. Microsoft, for instance, traded at 25 times sales at the peak of the dot-com boom. Today, it trades for a lowly 3 times sales, with giant Intel Corporation (NASDAQ:INTC) trading for only 2 times sales. Now, that’s out-of-this-world cheap.
Their trend is your friend
The mountains of cash that these businesses have been accumulating hasn’t gone unnoticed. Mr. Einhorn from GreenIight Capital, has been putting a lot of pressure on Apple’s management to return some its huge pile of cash to shareholders. Apple finally blinked.. and increased its annual dividend by 15% together with a massive $60 billion share buyback program. And Apple isn’t alone. ValuAct, a hedge fund, bought a $2 billion stake in Microsoft with the anticipation of implementing the same trick that Einhorn pulled with Apple.
Who’s the immediate suspect?
With shareholder activism on the rise, the tech sector as a whole is expected to benefit. But I believe that Cisco is still very early to the game. The most dominant player in the market of routers has an operating margin and a profit margin of 23% and 20%, respectively. It’s extremely profitable. But with a price-to-sales ratio of only 2 and P/E of 11 it’s equally cheap. But the special thing about Cisco, as I noted above, is its huge pile of cash. You see, 45% of its share price is pure cash in the bank. In other words, Cisco’s true share price (the price you pay for the business) is roughly $10, and not $20. That’s unprecedented. I believe that sooner rather than later, an activist fund will take a large stake in Cisco and begin to force it to part from some of its cash and deliver it back to the hands of its true owners, the shareholders.
The Fool thinks Big Tech
Big Tech has been an unloved sector in the past decade. But it’s now starting to change. With mountains of cash, high profitability and cheap share price, the smart money is finally beginning to take positions in these businesses. You should too, and it seems that Cisco is the best way to do it. So go on and make your move.
The article Buy Into This Value Trend While You Still Can originally appeared on Fool.com and is written by Shmulik Karpf.
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