Tags: Yahoo! (YHOO); Microsoft (MSFT); Intel (INTC); Google (GOOG) + Model Portfolio Review; Kubota (KUB); Caterpillar (CAT); Deere (DE); CNH Global (CNH)
11 am ET…February 6, 2008 — Special Edition…Part II (of II)
After Big Tech — alternative investments to Big Tech
We come not to bury Microsoft, but to praise it. That company’s historical track record is arguably the most-envied in the world. The problem is that track record IS history. And therein lies Microsoft’s frustration. This track record is illustrated in a table at the end of today’s “Views”, along with Google for direct comparison. Here is a summary of that comparison ~
1. Microsoft’s current market value of $288 billion has hardly budged since 2004;
2. In fact, Microsoft’s market value isn’t much larger than it was 10 years ago.
3. Google’s market value, while $57 billion less than a month ago, is still triple its 2004 market value.
4. Over the same period (2004 – 2007), Google’s revenues have increased by a factor of 5-times and its Net Income by a factor of almost 10-times.
5. By comparison, Microsoft’s revenues over that period increased by 40% (admittedly, from a base that is 10-times larger) and Net Income increased by 72%.
The Bottom Line— in yesterday’s “Daily Views”, we cited various empirical studies that the long term baseline Price-to-Earnings ratio for public companies is 16 times trailing earnings and 12 times leading earnings. We also pointed out, graphically that this is the stock price Yahoo was headed for, prior to Microsoft’s hostile bid at $31 / share last Thursday. One final conclusion we offer with respect to the Microsoft table…Microsoft’s current stock price is already at 16 times consensus earnings estimates.
Microsoft’s admitted motive to acquire Yahoo is to garner market share in search and online advertising. Even assuming the Yahoo acquisition enables Microsoft to do this (which means amalgamating search systems and advertising algorithms), Yahoo’s $7 billion in revenues are only a fraction of Microsoft’s $51 billion in revenues, and its earnings are almost statistically insignificant. Other than market share boasts and positioning by the millionaire businessmen running MSFT and GOOG, there is little for the average investor in this commercial battle.
Another motive may be to recapture the glory days of the last stock market boom. Here again, Microsoft is mistaken — those days were a once-in-a lifetime event. Here are some statistics to highlight that never-to-be-repeated era ~
When Microsoft and Intel were included in the Dow Jones Average in November 1999, that inclusion gave legitimacy to all so-called “4-letter (NASDAQ) stocks”. From September 1999 to March 10th, the NASDAQ Composite Index advanced 83%. Microsoft’s stock price was actually pretty lame in that period, however, newer arrivals, like Yahoo, doubled and tripled in price.
THE BASIC INVESTMENT CONCLUSION of the foregoing analyses (yesterday’s and today’s) is that the investment alternatives most likely to produce above average investment returns in the 12 months ahead will not be the large cap, highly visible stocks that generally get the most comprehensive coverage. We offer two graphs to confirm this outlook.
The above graph illustrates that for most of the past 6-months, Google (GOOG: $506.80) and Microsoft (MSFT: $29.27) have been preferred holdings within the overall market. However, that same graph for the past 5 days (since the announced hostile takeover of Yahoo by Microsoft, January 31st) tells a much different story…both Google and Microsoft are now underperforming all three stock market averages, a paradigm emerging only in the last 5-days. This divergence could accelerate.
This is the appropriate time to refresh collective memories about our Model Portfolio, specifically constructed out of the “other”, less visible public companies that operate below the radar screen, stocks that are underfollowed, overlooked, and possibly unloved. Companies like Kubota (KUB: $33.00) and Terex (TEX: $56.12), and one just added today – CNH Global (CNH: $45.66). CNH is a Dutch company, also in farm equipment, with consensus earnings growth of 22%. The stock is off $20 since the start of the year, and could get back to that level with a little patience.
Let us hear your thoughts below: