Tech Stocks Rarer Than Gold

by: Tim Ayles

In an attempt to protect themselves from central banks increasing the monetary base of sovereign nations, many anxious folks are increasingly hiding in physical assets like real estate or gold to protect themselves. The logic is often times based on the thinking that they aren't making any more land and gold is not debt. If you are able to identify a "true" gold bug, you will often hear them mock the price of "paper" gold (NYSEARCA:GLD) in favor of "phyz," which is translated to physical holdings of the metal. The new term "stacking" is now popping up as the gold market begins to falter and the bugs try to convince themselves of their bravery and brilliance by getting more physical in the face of lower and lower prices. Another trait of a true chicken little is someone who is buying precious metals whenever they have an extra dollar, while at the same time shorting the stock market. This trade clearly hasn't worked since August 2011, as it is down 41% from its peak.

If you are reading this article and that description fits you, I want to present an alternative to you today. I understand the logic behind the thinking of one wanting to own a "currency," which the government can't print, but the truth is, gold is not becoming more and more rare. As the price of gold rises, in fact, the yellow metal becomes less and less rare as mining companies (NYSEARCA:GDX) ramp up their efforts to pull the metal out of the ground.

Mine Production Worldwide




World Total Rounded




Source: USGS

At the end of 2009, the World Gold Council estimated that a total 165,000 tons of gold had been mined in the history of the world. Based on this number, the amount of gold in the world has increased an estimated 4.8% over the previous three years.

With the amount of gold increasing 7960 tons over the past 3 years, for those who are counting, this is the equivalent of 254.72 MILLION 1 ounce coins. That is almost enough to give every living soul in America one 1 oz. coin. When compared to the monetary base, gold does in fact seem like a very good alternative to a dollar bill. What many in the "End of America" camp are missing though, is certain stocks have actually become rarer during this time. If the price for any asset is balance between supply and demand, then gold has a headwind compared to certain stocks.

When I say that a stock is becoming rarer than gold, I am referring to stocks that are reducing their shares outstanding. If a company has 1 million shares outstanding and buys 100,000 shares, there are only 900,000 shares left. If the fear trade is truly based on the idea that the asset held is becoming more valuable because the currency it is priced in is being debased, consider replacing gold with these stocks as a hedge in an investment portfolio.



Shares Outstanding (Millions)









Intl. Bus. Mach















Source: ValueLine Investment Survey

While the amount of gold has increased 4.8% over the past 3 years, a share of stock from the companies above have become more rare during this time. Amgen shares has become 17.9% more rare, IBM 8.8% more rare, Intel 10.2% more rare, and Xerox 10.58% more rare.

Xerox: America's New Cheapest Stock?

Out of the four stocks above, I get most excited about Xerox. Xerox has really transformed itself from a seller of expensive office copier machines and other hardware to a company that is quickly growing in the Business Services sector. Its Business Process Outsourcing unit has increased revenues at a near double digit clip while its hardware/technology unit continues to die a slow death. The market is clearly missing this change of business focus as it continues to value the company as if it were a dying equipment maker like Hewlett-Packard (NYSE:HPQ) or Dell Computer (NASDAQ:DELL). With services as the focus, Xerox has found a niche that is making businesses it contracts with much more efficient.

With the acquisition of Affiliated Computer Services for $6.5 billion in 2010, Xerox was able to combine the experience of ACS in business process and IT outsourcing with its own expertise in document management and imagine technology. Every business, whether a college, manufacturer, hotel, restaurant chain, etc., has hundreds of business processes that happen behind the scenes. Employees and suppliers must be paid, computer networks must be maintained, customers must be able to complete transactions, etc. These processes are costly and bog down managements of these companies and take their attention away from their core proficiency: educating kids, selling widgets, booking rooms, making meals. By turning to Xerox, entities are saving millions of dollars while eliminating massive amounts of headache. The value proposition of what Xerox can bring to a large company it serves can be seen in the financials of XRX over the past three years. When I look at a company, my main metric is determining the free cash flow generating ability of the company. From there, I prefer to analyze what management is doing with that free cash flow. Free cash flow is basically the Net Reported Income of a company minus capital expenditures needed to maintain the growth of the company after adding back charges that affect net income, which are non cash related, such as depreciation, etc. That is a long and confusing definition, but truly is the crux of a successful business. If you were to buy a local small business, the free cash flow is the equivalent to the earnings you COULD take home after paying all expenses, rent, and equipment purchases you might need to keep the business going.

Take a look at the cash generating ability of Xerox since purchasing ACS:

Total Combined Cash Flow 2010-2012:

$6.136 billion

This number by itself is meaningless. If I told you the company was valued in the market place at $500 billion dollars, this isn't a very good deal. That would be like buying the local deli on your street corner for $500 thousand and only seeing the business make you $6000 over the previous three years.

No Bueno.

Xerox, though, is not overpriced at $500 billion. The current market cap of the company is only $10.5 billion, about the same value it was back in 2010. Buying XRX here at this price, with this cash generating ability, is like buying that $500,000 deli and enjoying a $102,000 per year income. That equates to over a 20% return on investment per year.

Muy Bueno.

Now that we have determined XRX is a cash cow, the next question an investor needs to ask is whether management is doing the right thing with the cash they are generating. Many companies generate a lot of cash, but then management does stupid things, like buy companies that are not a good fit, or sit on the cash.

Over the past three years, Xerox has paid its owners $863 million in dividends, paid off 3.115 billion in debt, and purchased $1.56 billion in stock. The stock buybacks alone have caused XRX stock to become rarer than gold the past three years. Last year alone, the company bought back nearly 10% of its stock, and all indications are that it can and may easily buy another 10% of the stock moving forward.

In another show of faith that its model is working, management also recently increased their dividend payment by 35%, pushing past the 2.5% yield level.

One headwind for XRX moving forward is the continued deterioration of its Technology segment. Europe has continued to be a drag on the company and U.S. clients appear to be delaying equipment purchases. This segment would really be digging into profitability if emerging markets had not been offsetting losses in its main markets so well. Regardless, the Servicing unit should continue to grow fast enough moving forward to offset any hardware unit deterioration moving forward. In 2012 alone, Xerox was awarded a number of sizable outsourcing contracts with the state of Texas ($848 million) and California ($1.6 billion over 10 years). Contracts are the type of revenue stream you want as a business owner, as you can plan your cash flow requirements. Revenue becomes much more predictable moving forward with those contracts compared to reliance upon your sales team to land the next "once in a decade purchase" from a client.

Based on the numbers above, I would encourage you, the next time you have a dollar to invest, not to reach for that metal that becomes less rare, and find a stock of a company that is aggressively buying shares. At the rate some of these companies are buying their stock back, those shares might become extinct. Share buybacks are nothing more than slow leveraged buyouts. As you may or may not know, when a company goes private, it is typically taken there at a premium to the current price. Long term, that bodes well for these stocks above.

Disclosure: I am long INTC, AMGN, XRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My clients are long all the stocks mentioned, plus IBM.