I like to pick Companies that strong portfolio managers select. In this case I focus on top holdings of Arnold Van Der Berg. Van Der Berg applies value investment strategies as his investment philosophy. His investment research seeks to determine the appraised value of a company, often referred to as intrinsic value. Investments are then made at a significant discount, normally 40% to 65% below the company's current intrinsic value. I studied Van Der Berg's top holdings via whalewisdom.com and analyzed several of his main picks to share my opinion:
Cisco (CSCO) - My opinion: SELL
Recently Cisco got two upgrades from top Research firms Oppenheimer and Barclays but I do not like the stock for reasons I will explain.
First, Barclays upgraded CSCO to Overweight from Equal Weight following Cisco's guidance reset last week and the subsequent share decline. They believe ownership of the shares offers material appreciation considering that valuation is extremely compelling.
Second, Oppenheimer noted that in a seasonal quarter, the Ethernet switch market declined 9.6% in 1Q12 to $4.8B. They explained that the big winner was Cisco gaining share in almost every category despite Romley's 1Q headwind.
Recently CSCO reported earnings and while they beat estimates, shares traded lower following downside guidance on conference call, going down almost 8% after they reported guidance.
In the last report, CSCO managed an earnings beat in a quarter for which in-line sales results were primarily supported by strong sales in APJC and by strength in service-provider markets, offset slightly by sluggish enterprise sales due to uncertainty and instability in Europe. I do not like that Cisco is affected by a continued macro uncertainty, competitive pressures from Huawei and more important continued trends toward commoditization of CSCO main products, such as campus and datacenter switching. I am very cautious on CSCO an prefer other tech stocks such as Apple (AAPL) or Intel (INTC).
I think that CSCO is a tech stock heavy affected by macro issues (Europe, public sector, conservative IT spending) as well as increasing competition and monetization.
Shares could be cheap but I think they could go to the lower levels of 2011, in the range of $13-14. I recommend selling or waiting to buy.
Microsoft (MSFT) - My opinion: BUY
I like Microsoft's coming products, which are the strongest of the last 10 years. Microsoft has plenty of legs remaining in several of its products (Office 2010, Windows 7, Kinect, etc.), has one of the most promising product cycles (Windows 8, Windows 8 Server, Office 12, etc.) in its history in front of it, and is levered to numerous secular trends (cloud computing, virtualization, big data, etc.), which should enable the company to outpace IT spending and outperform its peers for the foreseeable future. In addition, the stock has a super compelling valuation.
Given the growing trend of mobile platforms, MSFT has been taking steps to build a position in the mobile segment. In late 2010, the company announced that it would start building an OS to support the ARM architecture. This was an important decision strategically, since the major weakness in Intel s x86 architecture is with respect to the power it consumes. This is the reason it has failed to gain traction in the mobile space, where battery life is of great importance. Since Microsoft's new Windows 8 OS supports ARM architecture, I think MSFT will be better positioned in the mobile computing space (an area where it continues to lag the iOS and Android significantly). I think that the recent agreement with Barnes & Noble indicates that the company is probably looking for a hardware platform partnership that could give it an initial toehold in
the fast-growing tablet market.
Valuation is extremely compelling here. MSFT trades at a P/E of just 10x compared to 45.9x for the peer group and 13.5X for the S&P 500. I think the market is giving MSFT low multiples because they expect that MSFT growth in key tech areas such as mobile and online will be very low. However, I expect Windows 8 to gain traction next year plus other interesting products MSFT is developing.
Over the past five years, the shares have traded in the range of 8.6x to 23.2x trailing twelve months earnings. We have the opportunity to buy MSFT in the low end range of its historic valuation.
Wells Fargo (WFC) - My opinion: AVOID THE SECTOR
I do not like the financial sector. I think it has so many risks at these moment that make me avoid the banking sector.
Wells Fargo is the best stock from the big money center group. If I were to pick a stock in the banking sector, I would definitely select WFC.
In the last earnings season, WFC was the bank that best reported. In fact, both Compass Research and Openheimer made big upgrade in the stock. Also, it is important to see that strong portfolio managers pick WFC because the Company is solid and it is the most conservatively managed of all US big banks.
Compass Research has a target of $39 reflecting a lower risk premium as negative headlines from mortgage servicing issues appear to be largely behind the industry and credit performance continues to improve. Compass increased their FY12 EPS slightly above consensus, driven by a better mortgage banking environment. They remain positive on WFC as their actions in the current environment are likely to drive long-term wallet share gains and lead to multiple channels of additional revenues.
Also Openheimer noted that WFC's 1Q12 EPS of $0.75 were a penny above its expectations and two cents above consensus, and in its view it was a pretty clean and straightforward beat. It came primarily on stronger core earnings of $8.6B versus firm's $8.5B est as core credit costs were almost exactly in line with its expectations at $2.4B vs $2.6B in the prior quarter. There were some "special" expense items which were partially offset by reserve releases, and on a pre-tax basis, Wells crushed Oppenheimer expectations by more than 9%.The tax rate, however, jumped from 31.5% a year ago to 35.2% this year and thus the net income beat was only by 2.8%.
One strong reason for investing in WFC that I agree with is that credit quality continued to improve in 2011 as well as in the first quarter of 2012, with WFC reporting significant reserve releases. Considering the current economic environment, the recent trends in the credit metrics and the company's efforts to improve its credit quality, it is reasonable to expect additional reserve releases in the upcoming quarters. However, the pace of improvement in credit quality is projected to be slow in 2012 as portfolio quality approaches a stable, more normal level
Wells Fargo shares currently trade at 9.7x consensus 2012 earnings estimate, a 10% discount to the industry average. On a P/BV basis, the share currently trades at 1.2x, which is at a 9% premium to the industry average. The valuation on a P/BV looks very compelling given WFC's Return on Equity (ROE), which is 40% above its peers.
Dell (DELL) - My opinion: SELL
If you were to buy a PC or notebook, would you go for a Dell or Apple? I think it is essential to buy brands that the investor is sure that are strong and their core business is going well, no matter if shares are undervalued. The stock could be a "value trap" candidate.
In the last report, Dell reported Q1 (Apr) earnings of $0.43 per share, $0.03 worse than the Capital IQ Consensus Estimate of $0.46 while revenues fell 4.0% year/year to $14.42 bln vs the $14.91 bln consensus. The most important part was that DELL issued a downside guidance for Q2, forecasting Q2 revenue growth of just 2-4% q/q (~$14.7-15.0 mln) vs. $15.47 bln Capital IQ Consensus Estimate. We could accept a 2-4% for a Utility stock but for a stock in the Technology sector ?
Dell Enterprise Solutions and Services revenue grew just 2% y/y to $4.5 billion and contributed half of Dell's gross margin; The ESS revenue grew 5% excluding third-party storage. Dell Services revenue was $2.1 billion, up 4%. Services backlog increased 9% to $15.4 billion. Dell-owned storage grew 24% to $423 million. Server and networking revenue grew 2%. Please, avoid this low growth, low margin Company.
Additionally, management told that the demand environment was tougher than they had planned, highlighting weaker demand in markets like EMEA and parts of Asia in addition to public markets.
I think that while a generally weak consumer notebook was expected, the magnitude of the mobility revenue decline was surprising (down 13% seq, desktop down 12%). Consumer overall was down 12% yoy as Dell pruned its entry level business and demand shifted to smartphones/tablets. Large enterprise also weak (down 3% yoy and 6% in developed mkts) as some customers delayed IT spending.
Some investors could believe that DELL is making the right business model changes but that results will remain "chained" for years (not quarters) to commodity desktops/notebooks which comprise over half of sales.
I would avoid DELL. Too risky for me.
Intel - My opinion: BUY
I like Intel because the Company is the leader in the microprocessor market, remaining number one in terms of
market share and product performance. The company has focused on selling not just separate components but platforms optimized for specific markets, whether mobile, enterprise, or the digital home. Intel's innovative efforts are speeding up the entire computer, and not just the central processing unit (CPU). Additionally, the computational capacity of its chips is yet to be matched.
In a recent report, Sterne Agee noted that while INTC has been executing well, Sterne analysts believe the PC and Enterprise markets are starting to slow again given macro uncertainties, and a slower Win8 uptake in the channel, versus more optimistic consensus estimates. Also 2012-13 traction into the handset market will be limited. So, they still like INTC but will wait for better entry levels considering macro uncertainties. I think that recommendations is reasonable.
In the recent INTC analyst day, management delivered an upbeat and optimistic outlook for 2012-13, with expectations of continued PC-Datacenter growth and 25% growth in the Intel architecture segment into 2013. But management believe growth from Ultrabooks and new Handsets-Tablet markets is more challenging. While INTC has been able to capture better value and ASPs in the PC market with integration, they believe increasing wafer costs and declining ASPs pose a different set of challenges in the smartphone-tablet market.
I think that the market has doubts if Intel can lead the future tablet/mobile Industry and that is reflected in the current INTC valuation. Intel shares are currently trading at 11x P/E, a discount to the peer group, as well as the S&P 500. Moreover, it is at the low end of the historical range of 8.9x to 29.7x P/E.
I am a buyer of INTC at these levels because I think the Company will innovate and lead the future smartphone/tablet market. If that happens, expect material appreciation in INTC shares.
Other stocks that Van Der Berg likes
Recently KeyBanc Capital Markets upgraded HSC to Buy from Hold and sets target price at $27 saying they view management change as a positive catalyst to drive shareholder value creation. KeyBank says with the bar reset on earnings expectations and stock price, they see compelling risk/reward opportunity in HSC shares. An interesting stock to analyze.
I think that NEM bet is based on a view that Gold Companies has not risen as the commodity. Current bullion prices generate healthy cash flows for producers, but equities continue to lag. Some investors consider that major producers are evolving into value plays. Since the beginning of 2011, a significant disconnect has developed between the price of bullion and the precious metal equity sector. While this glaring disparity is first in the minds of precious metal equity investors, I believe that the major producers have become attractive value and yield plays. I do not feel comfortable investing in this sector but NEM could be interesting considering that Gold Companies eventually have to match the rise in bullion prices.