tech stocks

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About four months ago I made the case for going long Cisco. At the time, Google shares (GOOG) had popped 20%, and I was looking for a new company to invest in.

In the middle of July Cisco (CSCO) was trading at $15.66.  From a fundamental perspective, Cisco was cheap – selling at less than 10 times free cash flow, and had just started paying a 1.5% dividend. However, the market was discounting the stock price  because they didn’t believe the CEO, John Chambers, could revitalize the aging tech giant.

But regardless of the management, based on just the numbers, the stock was too cheap too pass up.

And numbers don’t lie.

Yesterday, Cisco announced stellar results. It seems that growth is picking up.

Since that last post, shares of Cisco are up almost 20%, at $18.61.

Cisco isn’t the only company doing well this economic environment.

Large cap blue-chip companies like Intel (INTC), Microsoft (MSFT), Walmart (WMT), Johnson &  Johnson (JNJ) are also doing well.  Even my old favorite Vodafone (VOD) which I bought over a year ago is doing well. The share price, currently at $28.39, is up nearly 23% from my purchase, and it currently yields 6.75%.

So what stock is worth buying today?

Believe it or not, it’s Warren Buffet’s Berkshire Hathaway (BRK-A or BRK-B).

Buffett recently announced that Berkshire would buy back shares below 1.1 times the book value. The world’s best value investor definitely recognizes value in his company stock price and has effectively put a floor underneath the stock.

Currently trading at a Price/Book  of 1.15,  the stock is close to that floor.

Let’s look at the B shares, or the baby Berkshires (BRK-B), which currently trade at $76.

Buffett’s 1.1x of book value puts the stock price floor at $72.69. But how much is the stock actually worth?

This is actually very simple to calculate.

The value of the publicly-traded securities owned by Berkshire is $63.66. The rest of the companies made $4.8 in earnings. These companies are worth about 10 times the earnings or another $48.

Add the $48 to the $63.66 and we get $111.66.

So buying Berkshire today means we have a floor at 5% below today’s price, and an upside of 31%.

Disclosure: I’m Long CSCO, BRK-B, MSFT, INTC, WMT and JNJ

Last week, search engine giant, Google (GOOG) jumped 15% in one day.

About six weeks ago, I wrote a post stating that Google was undervalued by 33%, and worth buying at around $500 per share.

Since then it’s jumped to $600, a whopping 20% jump, more if managed to get in at the low point. Quite a strong move for a large cap stock.

I still think the story for Google is strong, but if I didn’t already own it, I wouldn’t necessarily buy it today. Instead, I’d look for another cheap stock, something a little more boring.

As I wrote about in a previous post on investing in boring stocks, I prefer unloved, boring stocks with no growth prospects over exciting, glamor stocks. Incidentally, the stock I mentioned in that post, Johnson & Johnson (JNJ), is up over 10% in the past four months.

One of the stocks I’d consider is Cisco (CSCO).

This tech giant has lost its luster, with the stock price having gone nowhere for the past ten years.

I blame the poor leadership of the CEO, John Chambers, for the stocks performance. But at today’s prices, it probably doesn’t matter how incompetent the management is.

Cisco currently trades for $15.66 with a newly introduced dividend yield of 1.50%. It trades for a P/E of 12.2 but more importantly it trades for a P/FCF of only 9.2.

FCF or free-cash-flow is one of my favorite metrics when valuing stocks. It’s the cash left over after all the expenses have been paid out, and capital expenditures have been made. Unlike earnings, free-cash-flow is very hard to manipulate. Over the past decade, even though Cisco’s share price has stagnanted, the free-cash-flow has more than doubled from $4.1 billion to $9.2 billion.

For a stable, profitable market leader like Cisco, ten times free-cash-flow is a great deal. As Warren Buffett indicated in his purchase of Lubrizol, it’s okay to pay 20 times free-cash-flow for a great company.

Cisco also has an incredibly strong balance sheet, with about $40 billion in cash or $7.80 per share in cash – that’s almost half of it’s stock value.

Even though Cisco faces increasing competition and has a penchant for wasting money on acquistions that don’t seem to make any sense, it still has a wide economic moat. Cisco makes devices that move internet traffic. And the amount of internet traffic is increasing every day.

It’s only a matter of time before Cisco becomes a $25 stock again.

Disclaimer: I’m long Cisco.

I remember being in college back in 1998, when Yahoo! (NYSE: YHOO) was the leading search engine.

Around the same time, two graduate students at Stanford came up with a better way to search the internet. They started Google (NYSE: GOOG).

Now, Google is the number one internet search engine. Every day, Google processes 1 billion search requests. It’s also the leader in online advertising.

And Google’s always looking for new opportunities. Over the past decade, they’ve bought nearly 100 companies Almost every time they enter a new market, they become the dominant player.

Three things contributed to their success…

1. They buy the best company in the sector.

In 2006, they paid $1.65 billion for YouTube. It seemed like a lot of money at the time for a free service. But they’ve been able to monetize it with online advertising. YouTube also started renting movies, just like Netflix and Amazon.

2. They develop or buy the technology cheaply, and give away the service for free.

Google paid $80 million to buy internet telephone technology. They got the technology by buying Grand Central and Gizmo5. That’s 1/100th of what Microsoft recently paid to buy Skype. And they’ve already merged the technology with Gmail, and Android OS. The technology is Google Voice. It’s free for U.S. calls.

3. Google make its services easy to integrate with other software.

Microsoft, Apple and Sony don’t do this. They keep their technology secret, and it hurts them in the long run.

Google takes a different approach. For instance, Google opened up their mobile phone platform, Android OS to programmers, manufacturers and carriers. And they gave it away for free. Within 18 months, Android OS-based phones have become the largest segment of smart phones. With 33% of the market share, they’ve even overtaken the Apple iPhone.

And unlike Apple, they’re giving a third of the application revenue to the telecomm carriers. Understandably, the telecom companies are falling over each over to support Android phones.

Now Google is entering the laptop sector. It’s releasing the Chromebook, a Google OS-based laptop. It plans to rent it out to students and businesses on three year contracts.

Google has seen amazing growth. But the stock is cheaper than it’s ever been.

Google is valued at $172 billion. It has $36 billion in cash, and only $5 billion in debt. In the past twelve months it generated over $31 billion in revenue.

Over the past five years, revenue grew at an average rate of 35%, and net income at 42%. But the stock sells for less than 14 times next year’s earnings. Growth companies like these, with little debt and large cash reserves, usually sell for 20-24 times earnings.

The market is undervaluing Google’s future growth. Even at 18 times earnings, Google’s stock is worth 33% more.

I just bought two shares of Google for my Roth IRA account at $525. The only thing preventing me from buying more is the lack of dividends. But the growth is compeling at this price. If the share price drops below $500, I might pick up a few more.