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Kevin Graham
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I am a professional engineer from Canada. I am a passionate value investor and have a strong interest in finance, economics and the markets in general. I would describe myself as an investment sloth. I believe I understand the Graham-Buffett value method and take them seriously. My personal... More
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  • Time To Buy? Intel?

    Well it looks like I may be going to market shortly to make my first purchase of the year. Who-hoo! I would be willing to bet that the markets will fall on Monday with the poor employment report that came out on Good Friday. Likely the March employment report will be an anomaly but who really knows right?

    I know it may seem funny for an investor to have not done anything for months, but it really isn't. Charlie Munger (Buffett's partner) has said, it is best to move like a sloth since investment returns decline as activity increases. Buffett explained this simple concept in his essay on the got-rocks and the had-rocks. It said that investors would realize the full benefit of the earnings from the companies they own if they sat back and did nothing. Instead the play the futile game of "outsmart thy neighbor", or in the case of the mutual fund industry they play "keep thy high paying job" game by being smallest relative loser. Value investors sit back amidst the chaos, waiting patiently for price anomalies, and strike when obvious opportunities arise. It really isn't rocket science yet most still get caught up in the chaos.

    Anyway back to the stock I am going to buy... Without naming names I will say that the company has been hitting 52 week lows for a while now. It also sells for approximately 30 times my estimate of Q1 2012 earnings per share on an annualized. That should make it real easy to figure out, ya right. The company is currently facing some very significant headwinds in the short term, which is depressing its earnings per share. I just love it when this type of situation occurs because it gives those with a long term perspective an easy opportunity to profit at the expense of foolish, short-term thinking.

    Because I plan on purchasing this stock and will buy substantially more as the price moves lower, it may take a while before I report back on the details. Once I am completed my purchases I will reveal the name of the company. I almost feel like a kid at Christmas when a high quality company like this goes on sale at such a ridiculously low price.

    Intel

    Because of the tease above I will discuss an actionable investment that has been cheap for a while now (although I liked the price better a few months ago). Intel was a honorable mention for my top investments for 2011. Intel is a leading manufacturer of integrated circuits and it's primary product is microprocessors. Like many other large tech companies they have largely traded sideways for the past decade despite steady underlying sales and earnings growth during that time. The Price to Earnings (P/E) ratio has fallen from 55 times during the dot com era to the current 10 times earnings. They have $15 billion in cash on their healthy balance sheet. They also has a near dominate market position and no doubt you likely own a product that contains an Intel processor.

    I know when many people hear the idea they likely yawn and think they're "too big" to move the needle.

    Perhaps this quote made by the CEO of Intel, Paul Otellini, during the Q4 2010 Conference call will will perk some interest.

    "In 2010, total traffic crossing the internet was roughly 245 exabytes. This is greater than all the previous years combined. Over the next five years, a billion more people will join the global online community with 15 billion new connected devices including PCs, tablets, embedded devices and smart TVs. We estimate this will increase the data footprint across the Internet to over 1,000 exabytes. More people, more devices, more usages."

    Now that's something to talk about and it really makes it clear how much room a company like Intel really has to grow. Let's be honest folk, we are just at a beginning of a revolution technology yet if you asked the average person, they likely feel we've already arrived, how much more can technology change out lives?

    Over the next few years we will witness an explosion of new ideas that will radically transform our lives. Just think of the number of devices that require a microprocessor in your house and whether or not that number will increase or decrease over the next few years. Good question.

    Now as many readers will know Intel has a dominate market share in the PC computer space. Many likely don't know how Intel plans to take that to the next level over the next few years.

    Ultrabooks

    Due to the success of new thin devices such as the Macbook air, Intel quickly set out to trademark the word "Ultrabook". An Ultrabook is a ultra thin laptop with extended battery life without compromising performance. They utilize solid state drives, have very fast boot times, and will eventually feature touch screens. You can read more about them here: Intel's Ultrabook Site.

    These are really game changer for much of the home PC/laptop world of web browsing and social networking. What I really like is that Windows 8 is just arriving later this year as these devices come to market. "Win-tel", the nickname given to the Microsoft-Intel duopoly will likely continue its domination.

    Here is what the Intel said about Ultrabooks in the 2011 Annual report:

    Meanwhile, the PC itself is undergoing a renaissance. Last year, Intel led the industry in reinventing the PC experience with the launch of Ultrabook™ systems, a new category of thin, responsive, and secure mobile devices that combine the best features of tablets and notebooks. The first Ultrabook systems, powered by 2nd generation Intel® Core™ processors, were introduced in 2011, and we expect that the industry will bring more than 80 new Ultrabook system designs to market in 2012.

    These devices are just coming to market and 80 new designs are coming out this year. What I like the best is that all of the device manufacturers (Acer, Dell, HP, etc) pay a royalty to use the Intel "Ultrabook" trademark.

    Smartphones

    To date, Intel has been almost non existent in the smart phone processor business. For example, the Apple iphone utilizes ARM based chips. Earlier this year, Intel showcased their new smartphones chips and a few manufacturers signed up. Of notable significance is a multi year contract with Motorola Mobility covering smartphones and tablets, and a joint effort with Google to optimize future releases of the Android platform to use Intel processors. Motorola Mobility is a division of Google.

    If this area ever took off for Intel, the impact would be very material.

    Internet-Based TV Service Market

    This is another area that Intel appears to be investigating but nothing meaningful has been made public. It was reported in the Wall Street Journal earlier this year. If successful in creating a "virtual cable operator" it would represent another meaningful profit center if Intel can pull it off.

    Conclusion

    Intel appears to be a very modestly price company with some significant growth opportunities going forward with Ultrabooks, smartphones, and Internet-Based service ideas. We are really at the turning point and as the technology revolution goes global we will see meaningful growth for Intel and other technology companies. The sheer amount of data crossing the internet is not only mindboggling but will only increase. This makes Intel an great long term investment idea.

    In 2011, Intel generated $21 billion in cash, invested $10.8 billion in it's business (PP&E up sharply from $5 billion in 2010), paid out $4.1 billion in dividends and the best part, repurchased over 10% of the float for $14.3 billion. The balance was made up from an increase in debt and a decrease in cash. Management is screaming that the stock is cheap when they fork over that kind of money to buy back stock.

    Good Decisions.

    Best Regards,
    Kevin

    Disclosure: Long MSFT, BRK.b (I indirectly own some INTC through Berkshire Hathaway, BRK.b)

    P.S. - Anyone else notice that the analyst at Valueline got the shares outstanding incorrect? It should be 5.0 billion shares outstanding, not 5.581 billion (Click here). The report is dated April 6th, 2012. A 581 million share difference shouldn't make any difference going forward, should it???

    Disclosure: I am long MSFT, BRK.B.

    Additional disclosure: I indirectly own INTC via Berkshire Hathaway.

    Tags: INTC, MSFT, HPQ, DELL
    Apr 08 9:43 PM | Link | Comment!
  • Margin of Safety - Downside Risk
    “The research task does not end with the discovery of an apparent bargain. It is incumbent on investors to try to find out why the bargain has become available. If in 1990 you were looking for an ordinary, four-bedroom colonial home on a quarter acre in the Boston suburbs, you should have been prepared to pay at least $300,000. If you learned of one available for $150,000, your first reaction would not have been, "What a great bargain!" but, "What's wrong with it?"
     
    The same healthy skepticism applies to the stock market. A bargain should be inspected and reinspected for possible flaws. Irrational or indifferent selling alone may have made it cheap, but there may be more fundamental reasons for the depressed price. Perhaps there are contingent liabilities or pending litigation that you are unaware of. Maybe a competitor is preparing to introduce a superior product.”
     
    Margin of Safety - Seth Klarman– Page 153-154
     
    I have been thoroughly enjoying reading Seth Klarman’s book, Margin of Safety, the past little while. When I read this passage my mind instantly went to ATPG, and all the comments on my article. Almost all comments and articles highlight the huge value in ATPG while completely ignoring any potential issues. 
     
    To read the rest of this article click here:
    http://www.gurufocus.com/news.php?id=116641


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 06 11:40 PM | Link | Comment!
  • ATPG - Caught the longs with their pants down?
    We'll I just received an interesting link to a board over at the motley fool website. (If you posted the link at my blog please send me a quick email, I would like to talk to you.)

    To begin I would like to address a few of the statements in ValuePEG's initial post.

    ValuePEG states, "In Kevin's opening paragraph he states "I have never read any analyst reports nor have I read any comments by CanadianValue (a blogger was mentioned in the comment by Jason)". This was a bold face lie as he posted the following on his blog on Oct 23rd"

    Please read the comment in context. I have never read any analyst's reports on ATPG and I have never read any of CanadianValue's comments on ATPG.

    Continuing

    1) ATPG hasn't earned a dime in profits as a corporation.

    Bold face lie, not only has ATPG earned a profit based on GAAP rules in the past, more importantly they have been cashflow positive the last 9 months on a operating basis, as most investors look for in stocks in the E&P business


    Dear ValuePEG, please learn how to read a balance sheet. As of the end of 2009 they had negative cumulative earnings. I'm sure if I looked at the latest quarterly it would be even worse. Secondly, No matter angle you look at the income statement a profit is a profit and a loss is a loss. Go ahead a use Cash Flow if you like but that is what they did with internet stocks back in 1999. Lastly, speak for yourself, but please don't speak on behalf of other investors.

    And finally, "To toot my own horn the writer has 22 followers as of this writing here at SA, while I have 31 at MF CAPS"

    Congratulations you are my hero, do you pat your own back regularly?

    Then we have another commenter named Justmee1 ask Swizzled (Devin Shire aka CanadianValue) the following question.

    "Swizzled,

    And Morgus will move additional P UD reserves to developed reserves, raising asset values again 1H 2011? How exactly is the asset value calculated? (I presume that developed reserves are higher value, but how much higher?)"


    And then we catch Devin with his pants down.

    "I don't know enough about the calculation to offer an opinion."

    Well finally some honesty out of Devin Shire (CanadianValue). He knows nothing about reserves, how they are valued and walks around telling everyone he's an expert in oil and gas.

    And then we catch ValuePEG with his pants down.

    "As far as how exactly it is calculated i couldn't state but it is obvious that PDP counts at a much higher rate then P.D.P." (I believe he meant PUD's)

    Thanks for attempts to lecture me on ATPG. I am embarrassed I wasted my time discussing the stock with these guys. You both call yourselves value investors, yet you haven't determined what assets the company owns and tried to value them. It appears that these guys are attemping to determine how to calculate a net asset value over at the motley fool boards.

    You can follow their ongoing discussion here:

    http://boards.fool.com/re-sa-article-quotwhy-id-avoid-atp-oil-and-g-28879719.aspx?sort=whole

    Have a great Remembrance/Veterans Day Holiday!


    Best Regards,
    Kevin

    Disclosure: No position
    Tags: ATPG, Energy
    Nov 10 9:55 PM | Link | Comment!
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