We heard from three of the biggest tech Dow components last night as IBM (IBM), Microsoft (MSFT), and Intel (INTC) reported fourth quarter earnings results. Each member of this tech troika reported slight beats on somewhat weak revenue, particularly in the case of Microsoft. The performances could either be described as "vaguely encouraging" or "benignly disappointing," depending largely on whether or not you personally own the stocks.
Nonetheless, IBM, MSFT and INTC seem cheap on the basis of earnings multiples. The question is whether or not cheap and bland is actually an investment thesis. According to David Garrity of GVA Research, relatively low variability in performance is going to be the theme that pays for investors in technology this year.
Calling relatively expensive Nasdaq names Google (GOOG) and Amazon (AMZN) the "best houses in bad neighborhoods," Garrity doesn't think that's necessarily going to be a "recipe to drive stock prices higher." Based on the reaction to Google's earnings report after Garrity and I spoke, Mr. Market says it's right not to pay up for "fast growth."
Which brings us back to Intel and Microsoft, two names in my own portfolio. Though Intel "has not succeeded in stealing the field" for smartphone chips from Qualcomm (QCOM), Garrity says "the company is better positioned for a secular trend" than it's being given credit for. It's a view strengthened by Intel's decision to boost spending by 16% to, at the minimum, stanch the bleeding in market-share loss.
In terms of Microsoft, Garrity says the glass is half-full on the drop in revenues, suggesting the drop-off on the IT side is more a function of anticipation of Windows 8 this fall than corporations switching away from the Windows platform. It's also notable that Microsoft showed an impressive gain in entertainment and hardware, areas in which the historically "square" company wouldn't be expected to succeed.
Supporting his view that MSFT and INTC are "utility like" in many ways, Garrity is looking for dividend kickers for both stocks. "While they do have an attractive dividend yield now, the odds are better than 50/50 that they'll be able to raise that dividend over the course of the year," he predicts.
Yields strong enough to let you get "paid to wait" AND capital appreciation. You may be bored by the products of Intel and Mr. Softie but if you don't find yield and growth a financially sexy combination you probably shouldn't be running your own portfolio.
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