Friday, January 16, 2009

Time to Start Building Positions in TECH Titans? BAC: Hey WE Took a Look at the Books in Mid December & Said Wow We Need to talk to Uncle Ben

In a deep corner of my psyche,  often hiding in the shadows and cowering under the covers of nice warm blanket,   I know that a deep recession is the best time, possibly the only time, to buy common stocks.  Some companies may become viable purchase candidates during corrections in markets.  Occasionally, once in a blue moon, a new company will come along that has to be bought during a market upturn.  This would include a few companies like Cisco, Microsoft, Intel, Wal Mart and few others when in their infancy.  But, most of the time, the buying has be done during the period of doom and gloom.  The mind knows this to be true, but is still afraid of being devoured by the bogeyman and consequently sells when it is time to buy.  Then, once a decision is made to resist selling and to be brave and buy, then the only real question is whether the buying can be done with strong hands and an even stronger stomach.  This would mean at a minimum  no need for the cash used for at least two or three years, maybe as many as five.  If I buy now, I can not be shaken out of the position unless the viability of the tech titan is in clear jeopardy.   I have no need for the cash that I am using to buy now, most likely for the remainder of my life. 

 I do not view tech companies to be worthy long term holds, meaning for more than five years.    Frequently, their valuations make little sense considering their cyclicality as well as the negative impact on profit margins and growth from competitors eroding  market share and underpricing with functionally equivalent products.  Sometimes, I received catcalls, hisses and thunderous booing by comparing them to homebuilders or steel companies though more likely to generate cash for the balance sheet. To me, the only time to buy them is in their darkest hour, and even then I will stick mostly to those whose size, patents, cash and market share provide a cushion of protection and potential for both survival and renewed growth when the darkness lifts.  So, now, in my usual glacier speed, I am adding tech names to my portfolio, hoping to hold them for up to five years,  or until the bulls see no danger in the future, only boundless opportunities, with the P/E multiple expanding from the low teens to the 20s and beyond and the expansive multiple is applied to rapidly increasing earnings as if the momentum will continue to the end of days.  Then, I will sell without a moment's hesitation.  I have yet to fall in love with a stock.    

Sometimes I will nibble on smaller tech companies and I mentioned some that I bought and sold before 2008 in a prior post, including AMSWA, RADS, NTCT, KEYN and many others crushed during the current downturn.  While I may have not sold at the top, I sold for a profit and my last sale was at a much higher price than the current trades except for NTCT which has rallied some the past few days.  My inclination is to stick with the large cap names in my buying activity now due to the severity of this downturn.   Some of the smaller names may be worth a nibble only when the business remains viable and the pricing is close to net cash on the balance sheet.  I also see no need to hurry either.   I would hope, before I am done, to own 200 shares in EMC, Oracle, Microsoft, Intel,  & CISCO,  100 shares in LLTC, SMH,  and ADBE, with 50 shares in AAPL, HWP & RIMM.    

I suppose we are to believe Ken Lewis now when he says that Merrill's portfolio took an abrupt downward spiral in mid December, when most markets were recovering,  coming to light for the first time after the shareholders approved the merger on 12/5.  The WSJ points out the deterioration in those types of securities began in  mid November.  And, if Lewis is to be believed, none of those problems that allegedly first came to light after the shareholder vote were  overlooked during the due diligence that Ken and his team did before agreeing to the deal. He is claiming, adamantly, to have done a thorough job of due diligence.   Never mind that 25% of the protected asset pool comes from Bank of America.  If anyone wants to believe Ken now, please go ahead.   I for one would not believe anything said by the senior management of BAC.   When you lose credibility, you are not going to get it back.  Credibility once lost has found the same home as that fifty billion given to Bernie to manage.     Without a doubt, Lewis has destroyed more value than he has created and could ever hope to create.  But, it is up to the institutional investors to decide whether he stays or goes.  For me, any institutional shareholder voting for the Board at BAC needs to have a conservator appointed to manage their assets -for any further vote sanctioning what has happened would be tantamount to an admission of incompetency, in the mental sense of the word, beyond any reasonable doubt.   The same would be true for the Citigroup Board of Directors.   But to expect institutional investors and mutual funds to do much of anything would be absurdly optimistic. 

Also, compare what Ken was telling shareholders after the deal closed on January 1st with the ongoing discussion with Ben and Hank.

I thought that I would amend this post to add a reference to a research note from J P Morgan on Intel, summarized in Barron's, which contained a $10 price  I know that I will be a buyer below 10.  I made a note of their prediction  on 2009 earnings and revenues for future reference in these posts. 

My picture for the weekend is Ollie. 

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