Thursday, October 24, 2013

In the Long Run, Everything is a Toaster

I loved the way that John Authers started his "Smart Money" column in this morning's Financial Times:

In the long run, everything is a toaster.  This is one of the more memorable lines delivered by Professor Bruce Greenwald, who teaches the class in Value Investing at Columbia Business School that was once taught by Benjamin Graham, and taken by Warren Buffett.

The comment is a classic put-down by value investors against the overhyped hopes of rival "growth" investors.  Great innovations may make money for a while, they say, but eventually they will be commodified and compete on price, like everyone else - much like a toaster.

Authers goes on to discuss how Cisco - the router company that once sold at a multiple of 200 times earnings in the height of the dotcom bubble - is now trading at a discount to the S&P 500 (15x vs. 18x for the broader market index).

At the same time, Authers points out that Cisco is a much stronger company than it was a decade ago.  It pays a dividend, tells investors that it has more capital than it needs, and strengthened its core business.  In short, it has all of the attributes that a true value investor would typically desire, yet few seem to have any interest.

Cisco is only one of any number of tech companies that trade at very attractive multiples.  Apple and Microsoft are available for only 12x earnings, pay attractive dividends, and continue to put up growth rates that most of corporate America would envy.  IBM is offered at less than 10x, pays a dividend, yet has been widely panned by Wall Street for delivering third quarter results below Street expectations.

Meanwhile, over in the consumer staples space, tepid growth is rewarded with high multiples.  Coca-Cola, for example, trades at a multiple that is nearly 50% higher than large cap tech, yet it growth rates are projected to be less.

Why the anomaly?

I thought Authers captured it well in his last paragraph:

Big technology companies, with their high public profile and large market caps, are unusual candidates to be value stocks. But in this case, the value may be hidden in plain sight.  Either way, it is time to consign the dotcom bubble to the history books.  Technology has matured, and the market looks as though it may have exaggerated the extent to which it has matured. There is good reason to expect more interest from value investors in large technology stocks.