Think Big Tech Stocks Are Safe? Think Again

by Tim Melvin | April 9, 2014 12:04 pm

Think Big Tech Stocks Are Safe? Think Again

I don’t usually track such things, but it was pointed out to me this morning that Friday’s selloff produced a pretty decent rotation away from momentum stocks to the older sturdier tech stocks. This is one of the those patterns in the market that has puzzled me over the decades about investors.

MicrosoftNew185 Think Big Tech Stocks Are Safe? Think AgainI think it’s primarily the large institutions that engage in this type of behavior as they do the whole risk-on, risk-off maneuvering to make sure they perform in line with all their competitors and engage in job protection programs. After all, no one ever got fired for owning Microsoft (MSFT[1]).

However, everyone seems to forget that when things go bad, correlations go to zero and it almost doesn’t matter what you own.

Let’s take a minute and consider what you’d be getting if you were to buy big tech right now. I will use the Graham number to reflect fair value and use the Piotroski F-score as a measure of future prospects to see exactly how much of a hiding place the big tech stocks really are if the market were to roll over.

Microsoft is the biggest of the tech giants, and it also has the best prospects as measured by the F-score. The company earns a 6, so it’s in the upper third of ranking as the fundamentals and financials have been improving. However, it becomes tough to make the case that the stock is anything close to a bargain at current levels.

Using the aggressive approach and forward estimates for the company instead of trailing earnings, I can fudge the Graham number up to around $26 per share. The stock trades about 50% higher than that right now, so MSFT stock is not cheap. There is safety in the balance sheet with Mister Softee, and prospects appear to be decent for the underlying business but you pay a big premium for the stock right now.

Cisco (CSCO[2]) looks a little better valuation, as it trades at just the tiniest premium to its Graham Number of $22.50. With the dividend yield of more than 3% and pretty decent dividend growth prospects its not horrendously overpriced.

However, when we look at the F-score the company only earns a 4 so it can be expected to underperform the stock market going forward. It is reasonably priced given its prospects, and Cisco has a cash-rich balance sheet, but the stock would be very vulnerable in a selloff.

Intel (INTC[3]) continued to attract interest as the market sold off on Monday morning, but investors here are not exactly getting a bargain. The stock trades at a premium to its $22.40 Graham Number valuation, and the F-score of 4 indicators that the shares are likely to underperform. The company has a safe balance sheet and a reasonable dividend yield of 3.44%, but the stock is neither safe nor cheap based on valuation and prospects.

Rotating around the market in search of safe havens is not a practice that I even begin to understand. Buying illusions of safety without considering the standards of safe and cheap has proven to be an expensive practice in past market corrections and declines.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.

Endnotes:
  1. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  2. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  3. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC

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