With the Greek elections today (June 17) and the global sovereign debt crisis reaching a major point of maturity in the second half of this year, the smell of panic is in the air. As I've noted in previous articles (like this one), I believe the forthcoming panic will be out of fixed income assets -- namely government debt like Treasury bonds (TLT) -- and into equities. I believe this panic will be fueled by global QE, as I consider it increasingly likely that the European Central Bank, Bank of Japan, and the US Federal Reserve will print money and publicly signal that they are doing so. From this perspective, the question is not whether or not stocks will rise, but rather which sector will be home to the next bubble.
I don't favor tech stocks; I think there's lots of value to be created in that sector, but I think the opportunity is fully priced, if not more so. But there are three big reasons why I think tech stocks by and large are not a good opportunity now:
- As a whole, the tech sector is not big on dividends. Apple's (AAPL) recent dividend announcement is a prime example; its dividend of $2.65 per share gives it a yield of just 0.4% based on its current price. Money coming out of the bond market will want to see the security of dividends, as they will be purchasing stocks to do the job that they previously expected bonds to do: preserve capital and provide a predictable income stream. For the most part, these investors won't be interested in tech stocks.
- Many technology companies don't have real, tangible assets; their primary asset is their intellectual capital (i.e. employee talent, business processes, patent portfolio). For those fearing inflation, which is the kind of money that will becoming out of bonds and into stocks, tangible assets warrant a premium. Granted, hardware companies and tech companies with many dimensions to their business, like Amazon (AMZN) and Microsoft (MSFT) do have many tangible assets; it is more the social media stocks and software as a service players like Ebay (EBAY) and Salesforce (CRM) that have this problem. Still, though, it may discourage investors to focus intently on the sector as a whole.
- Tech stocks that are largely retail consumer-oriented in terms of the users they are looking to attract are especially susceptible, in my opinion, to the basic underlying condition of the global economy -- one in which savings are virtually non-existent and creditworthiness is increasingly difficult to come by. There are of course exceptions, but given that the most hyped technology companies (namely Facebook (FB) and Apple) have a retail focus, it could end up being a bit of a negative for the sector as a whole.
However, the fact remains that panics produce irrational behavior, and may cause people to revert to old behavior patterns they associate with good times and security. In light of how loved technology stocks are, tech stocks may benefit from investor psychology during a panic run into equities.
So, if there was one tech stock I were to speculate on from this perspective, which one would it be?
Assuming today's prices, the answer is simple: Intel (INTC). Here's why:
- It operates outside of the three reasons listed above to avoid tech stocks. The stock currently has a dividend yield of 3.07%, it sells tangible chips and processors, and is a computing infrastructure company -- not a retail play.
- Microprocessor prices have started to rise. Here's an excerpt from a piece on Intel I highly recommend to prospective investors that tells the story:
Microprocessor prices have finally started to rise, and with them Intel's fortunes. As reported by technology research firm IDC, average selling prices for PC microprocessors rose by 9 percent in 2011, their second year in a row of significant growth. Manufacturers of computers, servers, and mobile devices all are paying more for the innards of their products, and those higher prices will funnel right to Intel's bottom line (probably passing on to consumers as well).
With its dominant market share, Intel comes close to being a monopoly. True, Advanced Micro Devices, with a market cap of $5.5 billion, supplies the 20 percent or so (depending on the particular chip segment) of the market that Intel chooses to leave on the table. But with such deep pockets (roughly $15 billion in cash and short-term investments as of year end 2011), Intel could easily price AMD out of the market. We expect, however, that Intel will be content to continue to throw AMD a bone so as to avoid arousing the ire of consumers and government antitrust lawyers.
Moreover, Intel has a long history of success and innovation, proving itself to be a company that has a management structure that is capable of innovating. The firm's CEO, Paul Otellini, has been with the company since 1974 -- 38 years. I always favor CEOs who have risen from within, if not founders themselves, rather than an outsider just thrown into the mix.
So, to recap: Intel has earnings growth, dividends, a low P/E ratio, market share dominance, tangible assets, a customer base that is not directly retail, and a longstanding CEO presiding over an organization with a track record of innovation. If there is a panic rush into technology, I think Intel is very well-positioned.
Below is a chart that puts price into perspective. I think now is a great price to enter at, although investors may wish to have some capital set aside in case a fall to $21 occurs again.