Tech is tricky. But some technology companies provide essential services to our society, and it is important to own those that are among the best of breed. Be sure to understand what you can own in this industry. We live in a technological world – not one in which dot.com businesses should be the most valuable, but one that is governed and facilitated by the benefits of technology.
Let’s take a look at Intel Corporation (INTC). This business creates microprocessors – computer chips that make electronics functional. INTC trades at 10 times earnings and distributes a 3.5% dividend. It manages a strong 27% return on equity, and its revenue growth increases to the tune of 17% annually. That is representative of a strong business. As the world perseveres into an age of technology, INTC will exist and grow as an integral coequal. Over the last decade, U.S. equities have put up goose eggs on the scoreboard. I am led to believe that the next decade will be better for U.S. equities – especially those such as INTC.
Another tech superstar that may deserve a position in your portfolio is Applied Materials Inc. (AMAT), a company that manufactures flat panel displays and photovoltaic (solar panels) to other businesses worldwide. Over the last year, AMAT earnings have increased more than 280%. With a 25% return on equity, this California tech superstar is at the top of its game. It currently sells at 8.5 times earnings – a historically low valuation for such a business, and it pays a 2.7% dividend.
AMAT has a 17% profit margin and a 25% operating margin. The world is slowly becoming more conscious of Green energy and responsible construction. With the advent of L.E.E.D standards and an increasing awareness of the benefits of solar energy, AMAT stands to gain. All businesses would like to be aligned with environmental sustainability, and AMAT can help companies achieve this goal. It is also worth noting that none of the key executives at AMAT exercised any stock options this year. This may indicate that insiders trust in the potential for future share appreciation. It’s always reassuring when the execs have skin in the game.
The Hewlett Packard Company (HPQ) also deserves a close inspection. At $26 per share, it is clearly unloved on the Street. With a 22% return on equity, this is a clean operation. HPQ earns $4.24 per share and sells at 6 times earnings. That is dirt-cheap for a technological giant with a $50 billion plus market cap. HPQ holds $13 billion in cash on its balance sheet, and it pays nearly a 2% dividend. From my vantage, HPQ is well positioned to increase its dividend, make important acquisitions or buy back shares at current valuations.
You’ve got to own Google (GOOG), but it is critical that you buy it at the right price. Jim Cramer has said that Amazon (AMZN), Apple (AAPL) and GOOG are must haves in a complete portfolio. GOOG is an incredible company, and Larry Page and Sergey Brin are fully aware of the business’s potential. These two super wonks have figured out how to mathematically quantify the universe in a way that tailors to Internet user’s interests. GOOG dominates search, and its revenues from this engine will continue at rates in correlation to the growth of the global population. Consider this: no longer will people be born into a world without GOOG. It is here to stay.
In an economic environment that is growing at a snail’s pace, GOOG is expanding its operations, hiring and making cash hand over fist. GOOG shares were traded down in recent months in the wake of the expensive acquisition of Motorola, but pay that trend no mind. It boasts a 20% return on equity and a 32% operating margin. It is a business that requires very little capital input in order to generate sizeable returns. Earnings have grown 25% year over year, and I think this trend will continue. GOOG is well -positioned to remain a dominant player in the tech industry – it has the algorithm to prove it.
At around $600 per share, GOOG trades at 20 times earnings. If this were the year 1999, shares would sell for $3000. But it is not 1999. So it is critical that we value GOOG appropriately. I cannot imagine a way in which the economic moat could possibly be trespassed. It is an incredible business with enormous ambition. More importantly, the people at the helm of GOOG have the brainpower to totally realize the total potential of the business. Just wait until this search engine opens up in China – the untapped frontier for many of these tech superstars.
The Windstream Corporation (WIN) is a smart business with an enduring competitive advantage. It trades at just over $12 per share, and it pays an 8% dividend. However, earning $0.55 per share, it trades at approximately 22 times predicted earnings. Year over year, WIN earnings have increased 18%. Clearly, we have identified a great business. But where’s the entry point? I would wait on the sidelines with WIN on my watch list until we have a rough week on Wall Street – probably when Greece scares everyone in the headlines.
I believe that U.S. equities are the most undervalued asset class in the world. Over the past 6 months, the Dow Jones Industrial Average has undergone stomach-wrenching volatility as a result of political turbulence and turmoil within the European Union. Naturally, investors are cautious of equities, and even more wary of tech stocks. But once all these problems are segmented, there will be a tidal wave of fresh cash that enters the stock market. I want to be invested before this momentum. Even if Greece cannot get its act together and things in the European Union head south, the aforementioned companies will endure, even thrive, for the long-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.