Google Inc (GOOG)
The company is vital to the technology industry and not only are sales growing, the stock trades cheap relative to the rest of the market. In addition, shareholders know that Google+ offers a HUGE potential catalyst for shareholder value. According to sources, Google+ may already have 18 million users. This is a small share of the global social media space, but it is a great start for an invite only network. The stock market may have valued Facebook at as much as $200 billion. As such, any share of this space could yield significant returns to GOOG shareholders.
With all of this in mind, it is hard to imagine that the company trades at a trailing P/E of 23.55, a forward P/E of 15.34 and a PEG ratio of 0.88 even after the company healthy bounce following their recent earnings. In addition, valuations do not incorporate nearly $40 billion in excess liquidity on the balance sheets. GOOG shareholders can relax this summer knowing that the stock offers some margin of safety at these levels despite having various outlets for revenue growth.
Cisco Systems (CSCO)
The company gets little credit for its dominance. Instead, market watchers worry about competitive pressures driving down margins. They also worry about technological improvements that will lead to a commoditization of Cisco's high margin switch business. While competition is fierce in all industries, change happens fast in the technology industry and as such investors should always be vigilant. But considering the stock valuations, investors have a margin of safety.
The company's announced 6,500 layoffs are a bearish signal about the company's slowing growth. But they are part of a $1 billion annual operating expense reduction that should offer a short term catalyst for profit growth. In addition, it is evidence of management's increasingly proactive (though possibly still delayed) reaction to the changing environment. Also, as part of the cost cutting measures, the company sold its set-top box manufacturing business in Mexico to mega manufacturer Foxconn Technology Group (FXTC.PK). This move will result in a reduction of 5,000 employees.
For a company in transition, there are still a lot of things for shareholders to like. Even before factoring in the company's excess liquidity of $30 billion, the stock trades at a trailing P/E of 12.82, a forward P/E of 9.60 and a PEG ratio of 0.97. Worrying about a changing industry is par for the course when you buy a technology stock, but with cheap valuations and a great market position, the CSCO shareholders can relax.
Sirius XM Radio (SIRI)
We are so bullish of SIRI that we previously listed them among "5 Stocks That Could Double in Price." The satellite radio company's strong auto based subscriber network makes them a buyout candidate down the road once they pare down some of their debt. In the meantime, shareholders can enjoy some near term catalysts, not the least of which is the likely price increase to their subscription service next year. As part of the settlement in the "Blessing V. Sirius XM" case, the company agreed not to raise prices on their services until 2012. Because of this lawsuit, SIRI has hidden its pricing power. With 20.6 million subscribers, if the company raises subscription prices without affecting the churn rate, the company could see oversized benefits to the company's market capitalization since the operating expenses would rise at a lower rate. This is just a back of the envelope approximation, but if the company raises rates by $1 per user per month, this could increase market capitalization by around $750 million based on a price/sales of 3.0. Of course, as we discussed before, the market capitalization sensitivity will likely be greater since the price hike will provide higher margin revenues. In an ideal situation, this could increase the market capitalization by as much as 20%.
Wal-Mart Stores (WMT)
There's nothing sexy about this stock. The next time you're at a dinner party, don't expect to wow your guests if you discuss the benefits of investing in WMT, but strangely enough, the dominant retailer is a cheap stock despite its strong market position and global expansion opportunities. The stock trades at a trailing P/E of 11.93, a forward P/E of 11.13 and a PEG ratio of 1.15.
It has a much lower price/earnings and price/sales ratio than Amazon.com (AMZN) despite sporting a much higher profit margin than the online retailer. During the latest 12 months, WMT had a profit margin of 3.87% and AMZN had profit margins of 2.85% during the same period. WMT is cheap enough on its own, but it has a hidden upside if this country develops a uniform reform to minimize or eliminate the Internet tax advantage that has so far benefited companies like AMZN to the dedetriment of brick and mortar retailers like WMT.
Level 3 Communications (LVLT)
The company's expansive fiber optic communications network makes it a vital business. While its prospects have been muted by its heavy debt load and pricing. Analysts expect the company to lose money in 2011 and 2012, but the company should continue to benefit from a rapid secular growth in bandwidth demand. The company should benefit meaningfully from synergies following their merger with Global Crossings (GLBC). The estimated $300 million in annual expense reductions could have a transformative effect on both companies. The improved pricing power and the derivative exposure to cloud computing make LVLT is fairly inexpensive macro stock pick.