Why boring tech stocks could be your route to profit
Tech stocks may be the big gainers in the years ahead, says a Canadian analyst who makes the case for eight stocks and two ETFs.
Most investors enter the stock market full of confidence, often spurred on by stories of other people’s successes.
But all investments are fated to go down at some point. Only then do investors get a clear picture of the eternal balance of risk and reward.
It is that eternal balance we should be looking at now, says one Canadian analyst. And it should be telling us to curb our wishful thinking and look at some “boring” stocks.
Dr. Sunil Vidyarthi is president of an independent investment counselling firm.
Writing in Investor's Digest of Canada, he believes we should be looking at steady gains rather than quick fixes.
Many people still assume that well-established successful stocks simply won’t make them enough money. In effect, they’re “has-beens.”
Think again, says this analyst. Then take a close look at tech stocks.
While many people think the future lies in oil or gold, it is more likely to be in technology, he says. He points to eight stocks and two ETFs.
The age of innocence
Many people are first attracted to the market when they see somebody make a killing and spend the profits lavishly.
“The age of innocence ends when someone like a hedge fund manager goes to jail or is fined an obscene amount of money,” writes Dr. Vidyarthi. One’s first big loss in the market puts a dent in innocence as well.
This analyst first got the investment bug, he tells us, as a result of someone else’s conspicuous consumption.
On his Vancouver college campus, the don of the dormitory showed up one day in a flashy red Opel GT. The cost of the car was close to the average’s professor’s salary.
Surely he had a windfall. “Maybe I too could buy some junior mining stock and duplicate the don’s feat.”
That, says Dr. Vidyarthi, was the beginning of an age of innocence for a generation — an age that closed with the bursting of the dot-com bubble in 2000. Yet it’s the tech stocks that survived and thrived that may be your best bet today, he says.
A blanket assumption
Greed is so strong it often pushes us to ignore the facts and see what we would like to see, says this analyst.
Thus investors today may ignore “boring but great companies” like Microsoft Corp. (NASDQ-MSFT) and Intel Corp. (NASDQ-INTC)
Many compare these to gold or oil “and make a blanket assumption that these has-beens will never make any money.” It’s time to question that thinking, asserts the analyst.
Microsoft is trading at $23.95 with a very low forward price/earnings (P/E) ratio and a 2.6 per cent yield on its $0.64 dividend. Intel trades at $21.66, also with an attractively low P/E ratio. It yields 3.3 per cent on a $0.72 dividend. Both appear to have room to grow.
But the analyst has an even bigger point to make.
An edge on the market
If you’re still pining for the stock guru to find you an Apple (NASDQ-AAPL) while it’s still under $20, “well good luck!” says Dr. Vidyarthi. This very successful stock trades much higher today, of course, at $329.31.
His analysis, he explains, is “for boring individuals who simply want to get an edge on the market — a feat that’s been impossible to achieve for most people, pros or civilians.”
What’s boring now, he adds, served as cutting edge “nifty fifty” stocks for an earlier generation. Companies like Texas Instruments (NYSE-TXN), Dell Inc. (NASDQ-DELL) and, of course, International Business Machines (NYSE-IBM).
IBM is the odd one out in this group, notes the analyst. The other two tech stocks are still working their way back to the gains they made earlier in the decade.
Texas Instruments trades at $32 (it’s been in a narrow range for some time) and yields 1.8 per cent on its $0.52 dividend. Dell trades at $16.17 and pays no dividend.
But IBM has soundly beaten the market.
Up 100 per cent
The analyst displays a table of simple returns (without dividend yields). Since 2001, the S&P 500 has gained 8 per cent. Some tech stocks are below their 2001 level, and Microsoft has gained 19 per cent.
But IBM has gained 100 per cent!
For the record, it trades at $163.99 and yields 1.8 per cent on a dividend of $3.
All right, so Apple is up 4,200 per cent over the same period, the analyst concedes. But there’s no point in being jealous of your pal who did buy the stock when it was still cheap.
Just keep this in mind. IBM is no junior mining stock, but a long-established company with deep resources.
Indeed, when he looks at the charts, Dr. Vidyarthi is convinced more than ever “that tech stocks have turned the corner and are headed higher over the next decade.”
To take advantage of this growth, you could try what this analyst calls the “lazy way” — exchange-traded funds. He cites Power Shares QQQ Trust, Series 1 (NASDQ-QQQ) at $54.91 and Technology Select Sector SPDR (NYSE-XLK) at $24.87.
But, he tells his readers in Investor's Digest of Canada, tech stocks “have become so cheap in valuation that you need to look at buying them as individual value stocks.”
Or you could do a little of both and build your own “ETF look-alike” by buying a few shares each of Intel, Microsoft, Texas Instruments, IBM and Cisco Systems (NASDQ-CSCO), trading at just $14.93 and yielding 1.6 per cent on an $0.24 dividend.
You could even dig a little deeper and add some of those expensive Apple shares or even Google (NASDQ-GOOG) at $504.92 (no dividend).
Either way, you may have your “boring” stocks and your flashy car as well. “As a long-term portfolio, this is bound to beat any track record set by a university don. See you in the red Ferrari.”
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