{"id":24738,"date":"2011-10-26T08:00:59","date_gmt":"2011-10-26T12:00:59","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/10\/26\/update-to-wintel-the-buy-of-the-decade\/"},"modified":"2011-10-26T08:00:59","modified_gmt":"2011-10-26T12:00:59","slug":"update-to-wintel-the-buy-of-the-decade","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/10\/26\/update-to-wintel-the-buy-of-the-decade\/","title":{"rendered":"Update to \u201cWintel, the Buy of the Decade\u201d"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a>In September, I challenged readers to come up with two tech stocks that are more unloved than Microsoft (NASDAQ: $<\/span>MSFT<\/a>)<\/strong> and Intel (NASDAQ: $<\/span>INTC<\/a>)\u2014<\/strong>see \u201cWintel: The Ugly Sister and the Buy of the Decade<\/a>.\u201d<\/p>\n

As I wrote in September, it\u2019s not that investors hated<\/em> the old Wintel duo.\u00a0 \u201cHate\u201d is reserved for more recent fallen stars like Netflix (Nasdaq: $<\/span>NFLX<\/a>)<\/strong>, which we\u2019ll return to later. No, investors were indifferent<\/em> to Microsoft and Intel. In the era of smartphones and iPads, Microsoft and Intel seemed a little like buggy-whip makers in the age of automobiles.<\/p>\n

There were two major problems with this line of thinking.\u00a0 First, both stocks were incredibly cheap, trading at single-digit P\/E ratios and yielding more than the 10-year Treasury note.\u00a0 Secondly, both remain wildly profitable and continue to post record earnings.<\/p>\n

Intel knocked the ball out of the park last week with its third-quarter earnings release, sending its share price up sharply.\u00a0 Company profits were up 17 percent over last year, setting a new record of $3.47 billion, or 65 cents per share.<\/p>\n

I believe that Intel will eventually come up with a worthwhile chip product for tablets and smartphones.\u00a0 Or if not, they\u2019ll buy someone else\u2019s design.\u00a0 But even if Intel never successfully breaks out of its core markets\u2014and even if the company\u2019s growth rate ground to a halt tomorrow\u2014the stock would be cheap at current prices.\u00a0 In fact, Intel could rise by 50-100 percent and still be cheap given the safety and quality of the company.<\/p>\n

Ignore the drone of self-proclaimed tech experts that tell you the PC is dead.\u00a0 iPads are great, and the market for tablets is expanding faster than the market for desktop and laptop computers.\u00a0 But Intel\u2019s results should be proof enough that the PC market still has quite a bit of life left in it.\u00a0 Intel trades for 9 times forward earnings and yields 3.6 percent.\u00a0 Intel is a buy.<\/strong><\/p>\n

Microsoft, the other half of the Wintel duo, also released earnings last week.\u00a0 Earnings were up a respectable 6 percent, matching analyst estimates.\u00a0 Diluted earnings per share were up 10 percent.\u00a0 Interestingly, the Windows franchise broke a three-quarter slump, showing modest gains in sales of the operating system in the last quarter.<\/p>\n

I might add that Microsoft was able to post these gains in a sluggish economy with the highest unemployment in 30 years.\u00a0 Cash-strapped businesses and consumers aren\u2019t exactly queuing up to buy new computers, choosing instead to get a little more wear out of their existing equipment. That Microsoft is able to grow its sales and profits in this environment is testament to how essential its products are in the modern world.<\/p>\n

Microsoft, like Intel, finds itself in the position of having to convince investors that it is still relevant in the age of the iPad.\u00a0 PCs just aren\u2019t cool anymore.<\/p>\n

The company has collaborated with Facebook and has begun to incorporate Skype into its products (and into Facebook too, for that matter). But thus far, Microsoft has come across looking like high school mathlete geek desperately trying\u2014and failing\u2014to fit in with the popular kids.<\/p>\n

I\u2019m ok with that.\u00a0 As a contrarian investor, I prefer to buy companies that are distinctly uncool<\/strong>.\u00a0\u00a0\u00a0 It is the unloved and discarded stocks that offer the best returns to investors patient enough to wait for the whims of the investing masses to change.\u00a0 In the case of Microsoft, we\u2019re getting paid handsomely to wait.\u00a0 The company recently raised its dividend by 25 percent and currently yields just shy of 3 percent.\u00a0 Given that this is more than you can earn in the bond market, I\u2019m content to wait indefinitely.\u00a0 We\u2019re still making a decent return is a very rough market.<\/p>\n

\"\"<\/a>Chasing trendy stocks is a risky business.\u00a0 Consider the case of Netflix\u00a0 Earlier this year, the former growth stock darling could do no wrong.\u00a0 \u00a0The company that put Blockbuster into bankruptcy with its DVD-by-mail business was aggressively expanding its internet streaming offering.\u00a0 But why anyone would pay a premium multiple for the stock was a mystery to me.\u00a0 The company had no<\/em> competitive advantage, or what Warren Buffett likes to call \u201cmoats.\u201d<\/strong> \u00a0\u00a0There was absolutely nothing to stop a well-funded rival from offering the exact same product, and there was already a small degree of overlap with the streaming site Hulu.\u00a0 And Netflix was also completely at the mercy of its content providers, the movie and TV studios.\u00a0 Given the slow growth plaguing all media businesses these days, it was only a matter of time before the studios demanded a bigger slice of Netflix\u2019s profits.<\/p>\n

Let me be clear on something:\u00a0 I like<\/em> Netflix.\u00a0 I am a customer myself, and I believe that the company\u2019s streaming service is the future of TV.\u00a0 But there was so much optimism baked into the share price, I couldn\u2019t even consider buying it or recommending it in this newsletter.\u00a0 Even today, after falling by more than 60 percent from its high, the stock is still expensive.\u00a0 It trades at nearly 30 times trailing 12-month earnings and 18 times estimated 2012 earnings.\u00a0 And given the number of customers the company is losing in the aftermath of their botched divesture of the DVD-by-mail business, those earnings estimates may prove to be overly optimistic.<\/p>\n

I bring all of this up not to bash Netflix and its management but rather to make a point.\u00a0 When it comes to investing, you don\u2019t want<\/em> to be trendy.\u00a0<\/strong> Yes, you can make a boatload of money in a hurry.\u00a0 Plenty of instant millionaires were minted during the go-go days of the 1990s dot com boom.\u00a0 But when you invest in what is currently trendy, you are playing a risky game of musical chairs.\u00a0 It can be a lot of fun\u2026until the music stops and you find yourself without a chair.<\/p>\n

When you buy a stock that is unloved and cheap, there is always the risk that it becomes more<\/em> unloved and cheaper.\u00a0\u00a0 But if I\u2019m paying a reasonable price and getting paid handsomely in cash dividends to wait, that is a risk I\u2019m willing to take.\u00a0 At current prices, Microsoft and Intel remain the buys of the decade.<\/strong><\/p>\n

If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter In September, I challenged readers to come up with two tech stocks that are more unloved than Microsoft (NASDAQ: $MSFT) and Intel (NASDAQ: $INTC)\u2014see \u201cWintel: The Ugly Sister and the Buy of the Decade.\u201d As I wrote in September, it\u2019s not that investors hated the old Wintel duo.\u00a0 \u201cHate\u201d is reserved … <\/p>\n

Continue reading “Update to \u201cWintel, the Buy of the Decade\u201d”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-24738","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24738","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=24738"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/24738\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=24738"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=24738"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=24738"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}