Here’s where they’re finding solid value
In a Sector known for its Manic ups and downs…
Ten years ago you wouldn’t find a value fund holding a single technology stock.
Today, many of the world’s top-performing U.S. and global equity funds hold significant positions in these companies as they’ve transitioned from bubble-stocks to cash-rich darlings…
Value funds typically seek to isolate those companies trading at or below book-value, accompanied by rising free cash-flow per share.
They also seek low price-to-earnings ratios (P/Es) and, if possible, dividends. Benjamin Graham’s The Intelligent Investor remains the standard source of investment theology for this market discipline dating back to the 1930s.
Though the majority of actively managed mutual funds have consistently failed to beat their respective benchmarks historically, there’s still a case to be made for owning these
products. Indexing is no panacea.
Investors have wholly embraced this investment style over the last several years, brainwashed by low fees but forgetting that most benchmarks in the major markets have gone nowhere since 2000; adjusted for inflation, most indices are down since 1998.
Value funds typically made money in the first bear market of the last decade (2000-2002) and generally suffered a bit less than indexes in the 2008 market romp. It was almost impossible not to lose money in 2008. Every investment category save Treasury bonds, gold bullion or the Japanese yen shed big dollars. The 2000-2002 bear market saw value funds return en vogue after lagging benchmarks in the tech-mania in the late 1990s; many value funds made healthy profits avoiding tech stocks in 2000 and by over-weighting consumer non-durables.
Longer term, the leaders in this category like U.S. domiciled Fairholme Fund (FAIRX) and First Eagle Global Fund (SGNEX) have smashed the averages.
Offshore, Optima Platinum Fund and Orbis Global Equity Fund (both unavailable to U.S. investors) have trounced the MSCI World Index over the last five, ten and fifteen years.
Perusing some of the leading offshore equity global funds’ Top Ten, including Optima Platinum and Orbis Global, reveals that stocks like Microsoft, Cisco Systems, and Apple are among their biggest holdings.
In 1999, none of these actively managed funds held a position in technology. But they do now.
Microsoft, one of their favorites, has increased its dividend for the last several years and, although still low compared to big dividend-paying stocks, now yields just a bit less than the S&P 500 Index. Microsoft holds $30.1 billion dollars in net cash or 12% of its market-cap.
And Apple, making all sorts of inroads over the last ten years with its iPhone, the iMac and iTunes hoards $25 billion dollars in net cash or 13% of its market-cap.
According to the Bloomberg World Technology Index, 69% of the 169 companies forming that benchmark have no net debt. Collectively, the sector has a net $260 billion dollars in cash or 12% of its market-cap.
The Bottom Line:
Technology stocks are rapidly becoming the new safe-havens in the market.
High free cash flow and low net debt is exactly what investors should strive to isolate in hard economic times. But investors also like to see their cash put to work. Increasingly, it looks like tech stocks will start a new wave of acquisitions before interest rates rise much higher over the next few years. The cost of doing deals is still inexpensive, especially if you’re cash-rich.
Sincerely,
Eric Roseman
Investment Director for The Sovereign Society
Source: Sovereign Society