It’s not so much that investors hate the old “Wintel” duo (unless, of course, they are Apple (NASDAQ:AAPL) or Linux ideologues). No, “hate” would imply that they cared or even noticed the former tech darlings Microsoft and Intel. Remember, love and hate are both intense emotions that are sometime hard to separate. The real opposite of love, as any spurned admirer knows, is indifference.
Investors are indifferent to Microsoft and Intel. With all the buzz surrounding the Apple iPad and its competitors, the Wintel platform seems a little stuck in the 1990s.
But in ignoring these two technology matrons in favor of chasing the new tech “it” girl, investors are making a classic mistake. Recall the movie A Beautiful Mind in which Russell Crowe plays the eccentric (and, unfortunately, schizophrenic) economist John Nash. In explaining the Nash Equilibrium in layman’s terms that the average movie goer could understand, Crowe used the analogy of a group of men in a bar all competing to win the affections of the prettiest woman. In this scenario, one man might indeed succeed in getting her phone number, but the rest will not. The more optimal outcome would be for each of the men to approach a different one of her slightly homelier friends. The odds of dating success increase for all.
Though somewhat crude, this is exactly how value investing works. When investors all pile into the same glamor stock, the price gets bid up to the point that no one buying is likely to see good results. But the stocks that fail to attract attention — the less attractive sisters — are often priced to deliver good returns, particularly if they pay a respectable dividend.
Intel and Microsoft were glamor stocks a little over a decade ago. Both had price/earnings ratios of well over 30 in 1999, and neither paid much in the way of dividends. Not shockingly, both performed phenomenally poorly as investments in the time that has passed. Microsoft now trades for less than half of its old all-time high, and Intel trades for barely a quarter—and this despite Microsoft and Intel both seeing their earnings per share more than double.
It’s no wonder that investors grew indifferent to Microsoft and Intel. But that indifference has created a fantastic buying opportunity.
Microsoft and Intel both have single-digit price / earnings ratios and sport dividend yields of 2.4% and 4.2%, respectively. It should be noted that both yields are well above that of the 10-year Treasury note and that unlike the Treasury note, the payout of both companies is almost guaranteed to grow over time.
And lest anyone think that these low valuations are due to lousy operating results, both companies have enjoyed robust sales growth and high returns on equity. While Intel’s ROE is respectable at 25.9%, Microsoft’s is eye-popping at 44.8%.
Microsoft has had a hard time expanding beyond its core Windows and Office markets, but that’s ok. At current prices, even if all of Microsoft’s new endeavors prove to be failures—including its purchase of Skype and its partnership with Facebook—the company is a bargain at current prices. And if any of these projects actually pay off, Microsoft stock is the steal of the decade.
The same is true of Intel stock. While I fully believe that the company will make major progress in the mobile market (where it is currently weak), at current prices it doesn’t matter. If Intel never successfully expands beyond its core PC and laptop markets, the stock is still a bargain.
“Wintel” is not sexy, and it hasn’t been sexy in over a decade. But investors wanting a respectable and safe return on their money in the next decade should think twice before leaving her alone at the bar.
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