New sparks are flying in the energy markets.
Yesterday in London, the price of crude oil jumped by another 2.6% — and that was beyond Friday’s surge in New York.
In Nigeria, meanwhile, separatist guerillas are launching new, escalated attacks. Just in the last few days, they’ve kidnapped nine foreign oil workers, set several pipelines on fire and disrupted a major export terminal, and forced oil production cutbacks of 455,000 barrels a day.
In Iran, Palestine and throughout the Muslim world, we can hear the winds of war — financial warfare, economic warfare and even outright military conflict. Any one of these could threaten energy supplies. Any one could disrupt transportation. All have the potential to send oil and oil stocks skyward.
So the timing couldn’t be better for Larry’s recommendations going out tomorrow — to buy LEAPS call options on major undervalued oil companies. His goal: Gains of up to 16 to 1 — with strictly limited risk.
If you’re interested, today’s the last day; the deadline is midnight tonight.
The number to call: 877-719-3477.
We feel it’s a no-brainer. In contrast, however, investing in tech stocks is a different story entirely, as Tony explains below.
One Tech Stock Loser and
Two Tech Stock Winners
by Tony Sagami
If you’ve got tech stocks, you probably loved last week’s rally in the Nasdaq.
And the bulls would like you to believe that there is plenty more where that came from.
I admit the bulls may be able to keep their juggling act going a little longer, but the rules of successful tech stock investing are very different today than they were in the 1990s. If you’re still playing it like it’s 1999, you could be very disappointed.
And you don’t have to look very far to see what I’m talking about. Just in the last two months …
Google has plunged from $470 to $369,
Amazon fell from $50 to $39, and
Apple has slumped from $86 to $70.
Plus …
At Dell, Nearly Everything
I See Is Smoke and Mirrors
It didn’t get a lot of media attention, but something very significant happened last week: One of the biggest tech darlings in the world — Dell Computer — is within shouting distance of falling to new 52-week lows.
For good reason, I should add. That reason is a serious slowdown in business.
To find solid evidence, all you have to do is read the fine print in the report Dell delivered last week for the fourth quarter. Reading it is like driving along a dangerous mountain road — plenty of warning signs telling investors to slow down.
Slow Down Sign #1: Extra week skews results. Dell bragged about a 13% increase in sales to $15.2 billion. But buried in the fine print was the admission that Q4 had one extra week in it compared to Q4 of 2004.
By CEO Kevin Rollins’ own admission, that extra week added two to three percentage points to its sales growth rate. On a normalized basis, the sales growth rate was actually 10% to 11% instead.
Slow Down Sign #2: Falling profit margins. A symptom of an aging business is shrinking profit margins. Last quarter, Dell admitted that its profit margin fell to 17.8%, a number that was below both (a) Wall Street expectations and (b) the 18.5% Dell made last year.
Worse, the profit margins on Dell’s consumer division (PCs and laptops) have fallen all the way to 4% last quarter! That’s right — four lousy, stinkin’ percent!
Slow Down Sign #3: Share buyback skews results. In principle, stock buybacks are a good thing because they help improve earnings per share. But buying back shares is no substitute for growing profits through good, old-fashioned growth.
That’s Dell’s problem: It has been aggressively buying back stock but primarily as a maneuver to goose up its earnings per share. In Q4, for example, Dell spent $2 billion to buy back shares, and that enabled the company to reduce the number of its outstanding shares by 7% in 2005.
Result: On the surface, it looks like Dell grew its earnings per share by 14% from 2004 to 2005. However, without the share buyback, I figure the earnings would have grown by much less — as little as 7.7%.
Slow Down Sign #4: PC sales are flatter than a pancake. Dell has branched out into new areas such as printers and servers, and those divisions are doing well. The sales of servers and networking gear rose 10% to $1.4 billion; services increased by 26% to $1.4 billion; and software/printer/peripherals sales increased by 22% to $2.4 billion.
Good. But make no mistakes about it: Dell’s basic, bread-and-butter business is still personal computers, accounting for roughly 60% of Dell’s revenues.
And get this: Desktop sales rose by a measly 1% to $5.6 billion. One lousy percent!
Those disappointing Q4 results are not an anomaly either. Dell also warned Wall Street to cut its expectations for the first quarter of 2006: The company now expects to see sales growing by a very modest 6% to 9% — to $14.2 billion and $14.6 billion.
That means 39 to 41 cents per share, below the 42 cents the Jack-and-the-Beanstalk crowd was expecting.
No wonder Dell shares have shed a quarter of their value in the last 12 months! And no wonder they are slowly but surely stair-stepping their way down to a new 52-week low!
If you’ve been a Money and Markets reader for while, though, you were ready for this. I’ve consistently given you warnings about Dell, such as this one back in early November:
We’re not talking about one bad quarter. We’re talking about a tidal shift in the economics of the computer business and a steady decline in Dell’s profitability.
The shift has already hit the fan.
==> Dell’s sales growth rate in Q3 dropped to 11%, way down from the 21% growth rate it was enjoying 18 months ago and way, way below the 50% sales growth rates Dell was routinely reporting in the 1990’s.
==> The business just isn’t what it used to be. I say that because this is the sixth quarter in a row that Dell has reported slowing year-over-year revenue growth and the fourth quarter in a row that Dell has fallen short of Wall Street sales expectations.
The Dell lovers don’t want to hear it, but the evidence against the PC business is really starting to pile up.
Other PC Companies
Equally Vulnerable
I don’t want you to think that Dell is the only tech stock I’m pessimistic about. If you opened up your computer, you’d see the names of an entire list of companies in the PC food chain that are facing the same business slowdown as Dell.
I’m talking about companies like Micron Technology (DRAM chips) … Intel (processor chips) … Seagate, Maxtor and Western Digital (disk drives) … Logitech (keyboards and mouses) … Creative Technologies (sound cards) and … Ingram Micro or CDW (resellers). All companies and sectors I wouldn’t touch with a 10-foot pole.
The Hidden Gem in
The Dell warning
Even though I am down on Dell and most of the computer food chain, there is one golden nugget of news that tells you exactly where you should be investing your technology dollars:
Asia.
In Chinese, the word for “crisis†is formed by two Chinese characters — one meaning “danger†and one commonly used for “opportunity.â€
To me, that’s symbolic of a fundamental reality: A crisis can bring both a threat to your health or wealth … and … an opportunity for change — the danger of regression as well as a chance for progression.
What’s this got to do with Dell?
Well, even though Dell told Wall Street to take down its Q1 expectations, it was very clear that whatever growth it was expecting was going to come from Asia. Steve Felice, Dell’s top dog in Asia put it this way:
“As far as the long term … we certainly have the opportunity to grow as we have historically here. We still have plenty of opportunity in China, India, Australia, Japan.â€
He says that because Dell was able to grow its China sales by 28% … its India sales — where Dell is building a new factory — by 43% … and its South Korea sales by a whopping 73%!
The implication: Why invest in Dell which is bogged down in slow sales growth in the U.S. when you can buy a company that’s zooming with more rapid sales growth in Asia?
For example, compare the recent Q4 reports from these two Asian tech stocks:
Asia Opportunity #1
Silicon Precision
Industries (SPIL)
Right at this moment, you may very well be using this company’s product.
I say that because it makes the casings that hold Intel processor chips — that have the “Intel Inside†logo stamped on it. In fact, many of the largest chip companies in the world hire SPIL to package and or test its chips.
SPIL is an amazing growth story. Founded less than four years ago, SPIL has already seen its revenues soar from zero to $1.3 billion.
Like Dell, SPIL reported its Q4 results last week but instead of delivering disappointing news, SPIL knocked ’em dead with gangbuster results: 18 cents per share of profits, or four cents above expectations.
Four cents may not sound like a lot, but that amounts to a 28% upside surprise.
The reason for the strong results is simple: Sales are soaring! Fourth quarter revenues surged to $441 million, a 26% increase from the previous quarter and a staggering 59.6% jump from the same period last year.
What type of multiple do you think you’d have to pay for a company that is growing that fast? 40 times earnings? 30? 20?
How about just nine times earnings?
That’s what SPIL is selling for. Not only is it growing faster than most U.S. tech stocks, but it’s also selling for a fraction of the cost.
Want to know more? Good. In March, I’m headed for Taiwan and will personally tour Siliconware Precision Industries’ facilities and meet with their officials.
Asia Opportunity #2
Japan-Based
Trend Micro (TMIC)
This company makes some of the most valuable antivirus and Internet security tools in the world. And it’s also growing like a weed.
Trend Micro has recently received Tech Data’s prestigious “Best Solution†award.
And that’s nothing to snuff at. Tech Data is the second largest seller of hardware and software in the world and sold over $20 billion worth of IT products over the last year. That means that Tech Data certainly knows a thing or two about which companies have invented the best solutions.
My view: The slogan “build a better mousetrap and the world will beat a path to your door†sure applies to Trend Micro. Since starting in 1999, the company has steadily grown its sales to $622 million in annual sales in the last 12 months. That works out to a staggering 35% compounded sales growth rate!
And much like SPIL, Trend Micro reported a gangbuster fourth quarter. It pulled in a record 5.8 billion yen ($49.3 million) of profits on a record $20.57 billion yen ($175.1 million U.S. dollars) in sales.
Two more points:
First, business has been good but it is about to get a whole lot better: In October, Dell Computer announced that it would start bundling Trend Micro’s anti-virus software in all its new PCs.
Already, Dell is loading a free 90-day trial version of Trend Micro’s PC-cillin on all computers sold to North American consumers. As those 90-day trials expire and users buy the software, Trend Micro should see a surge in new sales.
Second, Trend Micro has increased its annual dividend from 36 to 56 yen. Not a bad little bonus.
Conclusion
When it comes to tech stocks, seriously weigh the dangers in the U.S. and the opportunities in the U.S.
My view: U.S. companies are aging. And the fast growing, nimble, aggressive, low-cost Asian competitors are eating their lunch. That’s the main reason shares in companies like Dell Computer are sinking toward 52-week lows.
Best wishes,
Tony Sagami
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
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