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Discussion Starter #1
I was reading the discussion about Apple, was about to post, but thought I'd start a new thread instead.

I noticed that the majority of tech stocks--Apple and RIM being two good examples--pay no dividends and have, aside from their intellectual property, a minimal amount of assets compared to their liabilities.

How do you go about valuing these stocks?

It seems to me that absent the payment of dividends at any price you are making a pure speculation play: you are in essence purchasing the stock hoping that in the future some other person (let's call him the sucker #1) will purchase the stock at an even higher value who, in turn, is hoping that another person will purchase the stock at an even higher price (let's call him sucker #2). Unless these companies grow or start paying dividends, I don't know why you would buy them, especially given the inherent risk in tech stocks, we all know they come and go.

If Apple and RIM are so profitable, why don't they pay a dividend while they remain profitable, and if they don't ever pay a dividend, on what basis can you really make a reasoned judgment to buy?
 

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I never buy tech stocks.
Technology (esp. the market that Apple, Google, Micro$oft, ORACLE, IBM, etc. play in) is so dynamic, unpredictable and volatile that it's very easy to get it wrong.
Think of where Yahoo was back in 2000 and where it has been since 2002.
Micro$oft has had some great products and dominates the desktop PC business, but the stock has gone sideways since the 2000 tech bust.
I'm not expert of course and there are folks that have made a lot of money with tech stocks.
I just don't trust the stability of that sector.
 

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You could hold a NASDAQ or technology fund to a limited portion of your portfolio. Tech tends to be out of synch with major sectors, and provides diversification.
 

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How do you go about valuing these stocks?
I value tech stocks identically to regular "bricks'n'mortar" companies.

This explains, in large part, why I don't have a lot of tech stocks in my portfolio.

For me, ideally,
P/B < 1.5
P/E < 15
ROE (5yr avg) > 10%
Debt/Equity < 1
Current Ratio > 2
Net profit margin (5yr avg) > 5%
Market cap > $100M
Dividend yield (5yr avg) > 0%


Of course, it's not always possible to get companies that satisfy these ideal criteria, so some flexibility has to be baked into any stock screen.

Also, as someone who works in the semiconductor industry, I tend to be very picky about the types of tech stocks that interest me. (I don't like "service" companies [think EDS or CGI] or purely web-based firms. I like, but am very picky about, software and fabless semiconductor companies.)

K.
 

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Berkshire doesn't pay a dividend and they are far from a speculative stock. Companies that don't pay dividends and retain earnings because they are trying to grow the business and increase shareholder value. This is especially true with tech stocks which spend a lot of money on R & D.

Now if you ask me specifically about apple. I would say they are definitely over valued even though they've had great growth over the past few years. However that growth stems from the fact that they have been charging a premium on all of their products and people have been willing to pay that premium.

There are a lot of apple fan boys who think they are bucking the status quo of a restrictive Microsoft. Eventually people will realize that Apple is even more restrictive then Microsoft. Once you get on apple they design their products so that you can never get off of them. People will wake up and they will stop paying that apple premium.
 

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Discussion Starter #6
I guess I have trouble with the notion that you are simply buying something hoping someone will buy it for more in the future. As for growth, the term gets thrown around a lot, but I don't see how growth does any investor any good if the company is never going to pay dividends. And if you were hoping for growth into emerging markets, why would you take a gamble on a particular tech stock rather than just invest in the emerging market itself.

On Berkshire, without having studied it much, it seems as though the profits are used to buy even more companies and therefore build even more assets, so the increased price is justified. That is real growth in my eyes.

Dr_V, when you calculate P/B, does that include the consideration of intangibles (i.e. intellectual property)?
 

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Dr_V, when you calculate P/B, does that include the consideration of intangibles (i.e. intellectual property)?
During the stock screen, yes, I do consider intangibles.

However, once I've gathered up a list of suitable companies, and I start digging into their annual reports, I will often "zero-out" their goodwill & intangibles sections if I deem them to be worthless, and then re-evaluate that company on an individual basis.

(For example, I personally put very little faith in software companies' patents. Heck, even I have a software patent ... and the company I worked for gave me some money, as usually happens in high-tech. But that said, will the company ever make money off of my patent? I doubt it very much -- it's very much a "defensive" type thing. But at the same time, I wouldn't be surprised if the company ascribed a large monetary value to to this patent for accounting purposes.)

Basically, when narrowing-down companies to buy, I often find myself buying companies which are trading close to their tangible book values, but I do bake-in some flexibility if I think that a company "adds value" in some non-tangible way. This kind of qualitative flexibility is hard to describe, but involves trying to take a guess at the company's "moat of protection" (in Buffett's terms), and then seeing how far away from the ideal you're willing to stray.


K.
 

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During the stock screen, yes, I do consider intangibles.

However, once I've gathered up a list of suitable companies, and I start digging into their annual reports, I will often "zero-out" their goodwill & intangibles sections if I deem them to be worthless, and then re-evaluate that company on an individual basis.

(For example, I personally put very little faith in software companies' patents. Heck, even I have a software patent ... and the company I worked for gave me some money, as usually happens in high-tech. But that said, will the company ever make money off of my patent? I doubt it very much -- it's very much a "defensive" type thing. But at the same time, I wouldn't be surprised if the company ascribed a large monetary value to to this patent for accounting purposes.)

Basically, when narrowing-down companies to buy, I often find myself buying companies which are trading close to their tangible book values, but I do bake-in some flexibility if I think that a company "adds value" in some non-tangible way.


K.
So what shows up on your screen these days?
 

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Generally speaking, the companies that have limited growth potential pay out dividends. As the companies mature, you will more likely see the dividend payouts. But remember, not all dividend paying companies are created equal. Does the high dividend yield always imply a less riskier company? For me, dividend is just another tool in evaluating a stock.

Many thought these were great dividend stocks as well - General Motors(GM), Lehman Bros(LEH), Washington Mutual(WM), Bear Stern(BSC) or even Enron(ENE). The risk is inherent in any stocks, not just in tech sector. You need to weigh in your own risk tolerance and investment style.

Agree with Soils4Peace. Tech stocks do provide decent diversification at least in my portfolio.:)
 

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I guess I have trouble with the notion that you are simply buying something hoping someone will buy it for more in the future. As for growth, the term gets thrown around a lot, but I don't see how growth does any investor any good if the company is never going to pay dividends. And if you were hoping for growth into emerging markets, why would you take a gamble on a particular tech stock rather than just invest in the emerging market itself.
On Berkshire, without having studied it much, it seems as though the profits are used to buy even more companies and therefore build even more assets, so the increased price is justified. That is real growth in my eyes.
Berkshire uses its profits to buy other companys and not pay out dividends. At the same tech companies retain earnings to pay for R&D and develop new patents and products which increase profit and therefore shareholder value.

Your greater fool fears only come into play when valuations get out of whack. This isn't isolated to just tech companies but to all companies. Would you consider apple a bad buy if their market cap was a 1 billion but they make $2 billion in profit every year?
 

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Discussion Starter #11 (Edited)
Berkshire uses its profits to buy other companys and not pay out dividends. At the same tech companies retain earnings to pay for R&D and develop new patents and products which increase profit and therefore shareholder value.
Paying for R&D that will hopefully lead to patents isn't growth, it's the bear minimum that is required to stay competitive in the industry, and whether that R&D will lead to the next iPod is almost impossible to say without speculation (this is where I have trouble).

Your greater fool fears only come into play when valuations get out of whack. This isn't isolated to just tech companies but to all companies. Would you consider apple a bad buy if their market cap was a 1 billion but they make $2 billion in profit every year?
Of course not. I just have not come across any tech companies that have a ratio like that, and if they did and weren't paying dividends, I would wonder what they are doing with all those profits.

I'm not trying to dump on tech stocks, I was just looking for valuation approaches that try and reduce speculation as much as possible, as that seems (to me anyway) to be the main approach taken when anyone talks about them. I would be interested to hear what sort of tech stocks Dr_V holds, as most I have seen have huge price to books.

Thanks for all the advice so far.
 

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So what shows up on your screen these days?
There are generally 5-10 stocks that pass my screens at a given time, but the more interesting question is which of these I currently consider to be good buys. The two that I like currently are:


  • Precision Drilling Trust
  • Uni-Select

You may note that neither of these are tech stocks; I haven't seen any decent tech stocks in a while.


Disclaimer: I own shares in both of those companies. This is not a recommendation to buy or sell these stocks.
 

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I would be interested to hear what sort of tech stocks Dr_V holds, as most I have seen have huge price to books.
I currently only hold three tech stocks which were purchased when their prices were much lower. One of these stocks is my employer, whose stocks I can buy at a discount through the company's ESPP plan (and I won't list it here); the other two are:


  • Gennum Corporation
  • Ingram Micro

K.
 

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Paying for R&D that will hopefully lead to patents isn't growth, it's the bear minimum that is required to stay competitive in the industry, and whether that R&D will lead to the next iPod is almost impossible to say without speculation (this is where I have trouble).
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Well I can tell you one thing to look into is find out what % of a tech companies earnings come from things like Support contracts and managed services. This days companies like Dell, HP, and IBM are less focused on making money from hardware and more focused on selling one of their varying levels of support.

I probably wouldn't put RIM and Apple in the same category because one is corporate focused while the other is consumer focused. As far as I'm concerned RIM has their market locked down while Apple is continuing to fight off competition despite its ability to grow its market share.
 

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Well I can tell you one thing to look into is find out what % of a tech companies earnings come from things like Support contracts and managed services. This days companies like Dell, HP, and IBM are less focused on making money from hardware and more focused on selling one of their varying levels of support.
In my humble opinion, they are playing an increasingly losing game.
A lot of corporations are moving away from the high cost support contracts with HP, IBM, etc.
The TCO is just way too high.
Also, these companies (esp. IBM) has become greedy with this business model and have been ripping off their customers with incremental charges, change requests, etc.
A large Canadian insurance company (not gonna name them here) are fed up with their long term support contract with IBM - and they are not the only ones "stuck" in this manner and neither is IBM the only one guilty of such practices.

Due to intense competition in the OEM hardware and software business (and diminishing returns of scale), these guys have been trying to make up their profit margins on the support contracts, just as you are saying.
However, that aggressive attitude is now pissing off customers.

There are several other reasons why this is going to be a losing game in the long run.
Some of the reasons I can think of are:
- Standardization of hardware and software in the marketplace
- Maturity of Cloud computing
- Lower cost, local players
- Outsourcing to cheaper parts of the world (India, China) esp. accelerated by fast progress made in increasing bandwidth and fiber optic availability in these countries

I'm not saying Dell, HP, etc. are gonna crash and burn anytime soon, but neither do I see double digit growths.
 

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I am a little surprised nobody has mentioned LMT thus far. Any thoughts out there, besides being somewhat reliant on gov't contracts for certain aerospace products.

And it pays a dividend.
 
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