“You are what your record says you are,” was first coined by former Miami Dolphins president Bill Parcells who uttered the phrase in response to fans and various media sources who often make excuses for or seek moral victories for their team’s win-loss record. In other words, there’s no such a thing as a “great 3-7 team.” Conversely, a team that has a 7-3 record can’t be considered bad. In the stock market, good and bad teams or (in this case) companies are determined by one thing - quarterly earnings.
To find companies sporting good records on the market, one does not have to look farther than firms such as Apple (AAPL), Sirius XM (SIRI), Cisco (CSCO) or Oracle (ORCL). Not only are these companies leaders in their respective industries, but each have outperformed the broader market when economic conditions suggested that they shouldn’t have. In other words, these have been the safest bets up to this point with no clear signs of losing. To maintain the sports reference, each has “covered the spread.”
Where there are winners, there are also the market’s perennial losers. These include such names as Research in Motion (RIMM), which can’t seem to get its act together, Netflix (NFLX), which is now on life support, and Bank of America (BAC), which is now trading at the price of a Subway 5-dollar foot-long. Each company has two of these three things in common – a poor public image, stiff competition and bad managerial decisions. In Bank of America’s case, it can be argued that it has all three. While excuses continue to be made for why these stocks have acquired their current status, their records (whether favorable or not) speak for themselves.
On The Fringe – Dell And Microsoft
While it was pretty easy to identify the winners and losers, there are firms that I consider “on the fringe” – that is to say, I have yet to make up my mind as to which category they belong. The first one that comes to mind is Dell (DELL). Interestingly, I’m not certain that even Dell knows how to categorize itself. Widely known for its focus on laptops, desktops and servers, the company now wants to be known as a provider of “innovative technology and services.” It seems Dell now wants to follow the IBM (IBM) reformation project that has proven to be very successful. But will it work?
For Dell, it is clear that it continues to lose market share to Apple’s iPad in its PC business, but who isn’t? So regardless whether or not this was a change that was forced upon it, it has to be welcomed by investors if IBM remains the model for its success. During its Q3 conference call, Dell did not inspire much confidence in its ability to successfully transform, but did convince that it was necessary. It reported net revenue that was in effect flat, at $15.4 billion, and consisted of a 2% drop in product sales that was more than offset by 8% growth in service revenue.
Its server and networking segment posted robust 13% growth to account for 13.6% of the total top line. This was one of the reasons for my current position as to whether or not to declare them a winner or loser. Though the stock has languished for the better part of the year, it has shown an ability to steal share from Cisco in networking gear.
Yet, aside from services, its remaining businesses posted negative growth, with the largest declines in storage and the aforementioned PCs. - which fell 15% and 6%, respectively. What was interesting to note was that Dell’s bottom line was aided by its recent attempt to migrate away from PCs to higher margin areas such as services. These contributed to higher gross margins and operating profits - to the tune of 3.5 billion and 1.1 billion, respectively.
While it’s still too early to proclaim Dell’s status among the winners and losers, I have to say that I am pleased with its current direction and willingness to transform. It also appears that this transformation has mostly flown under the radar and gone unnoticed by investors. Understandably, investors have decided to take a wait and see attitude toward Dell and looking for clearer signs of direction for growth.
Another company that I have yet to figure out is Microsoft (MSFT). I could easily and fairly assess it a failure considering the expectations that it has yet to reach. The truth is I don’t think that Microsoft’s board or its shareholders have held the company accountable enough for its numerous missteps. These days, it seems to be content with just “getting by," abandoning strategies that excite investors.
Another reason to consider that it might be turning the corner is in its 2012 Q1 earnings announcement. It reported overall revenue growth of 7% – which cannot be considered terrible considering its massive size. Revenue from its flagship Windows was up only 2% - attributable to slow-moving domestic PC growth. The server and tools segment showed decent 10% increase in sales, while the business unit was up almost 8%. So there is still some growth within the company.
There area where it did not fare so well was in its margins – which suffered more than two point declines from the previous year while operating income grew by a modest 1%. It is hard not to blame the margin loss on lack of execution and poor decisions by its management. The Skype acquisition and its online partnership with Yahoo (YHOO) so far have netted negative results.
On the bright side, Microsoft announced that it plans to bring its Kinect motion controller to PCs. This has been one of the only bright innovative ideas created by the company and one that can be considered a hit. Microsoft clearly needs to decide on some new dynamic directions and then convince investors that not only is it moving in the right direction, but it will be successful in its execution. But until then, I can only say that the jury is still out.
As in sports, all of the companies mentioned have something in common. To investors, they bring out both thrills in victory and agony in defeat. But unlike sports, where a team’s record typically determines its championship fate, each company (regardless of record) is only one good idea away from dominating for a decade or two as Apple showed with its iPod invention. In sports, these teams are then called “dynasties”- on Wall Street we call them “blue chips.” What is remarkable is how closely mirrored stocks are to sports in the manner that we sometimes become fans instead of investors.