The “best of” newsletters have not been generating a lot of marketing buzz in recent months, but many publishers have them and they’ve been a reliable way to get “entry level” subscribers to try out their products — in the hopes that some of those subscribers will then upgrade to their specialized, more expensive letters.
The basic idea is that the publisher or an editor looks over the half-dozen or so newsletters from that publisher each month, then highlights one of the ideas from those letters as the best and features it as the “Stock of the Month” (or some similar label). One of the pushier newsletter publishers on this front has been Cabot, which frequently touts its “stock of the month” idea as having the potential to be their next double…
… depending on the stock and the month they might call it the “next Monster Beverage” or the “next Priceline” or “next First Solar,” or at least say that this idea shares some similarities with those knockout growth stocks (Cabot is a growth-focused publisher, though they do have some letters that stray from that focus).
This time around, the comparison is to Amazon.com for some reason (the only real reason I can think of is, “most investors have heard of Amazon and know the stock has performed well” … the stock being touted is nothing like Amazon).
Here’s how Timothy Lutts, the publisher, introduces his pitch:
“As the publisher of Wall Street’s most respected family of investment advisories, I’m in a unique position to scan the investment horizon and select the most timely investment opportunities from all of our publications.
“So unlike most investors who are chained to one investment style, waiting for the market to turn their way, my unique position allows me to choose among the best stocks that are currently in favor across all investing styles….
“we don’t just pull our monthly recommendations out of a hat. We start by taking a critical look at the entire investing landscape, paying particular attention to what kinds of stocks the market is rewarding now.
“Then, drawing on the expertise of the editors of Cabot Market Letter, Cabot Dividend Investor, Cabot Top Ten Trader, Cabot China & Emerging Markets Report, and Cabot Benjamin Graham Value Investor, we pick the one stock that’s most likely to perform well–given the market conditions–in the months ahead.”
Well, that’s a relief. I’ve been known to use the “pull out of a hat” stock-picking system myself, but some folks clearly pull them out of a darker place.
So which stock do they think is their very best idea this month? Here are our clues:
“Just Look at My May Stock of the Month
“Like Amazon.com, this company is also riding a wave of unstoppable growth.
“But unlike Amazon that now dominates the online retail sector, this company is the leading holder of patents for chips used in cell phones and other network-connected devices.”
Right, so also riding “unstoppable growth” … but in all other ways completely different. More clues:
“Instead of trying to fight it out in the highly competitive cell phone retail sector, the company makes $18 billion a year licensing its mobile technologies to virtually every cell phone manufacturer on the planet…
“… this company generates so much money from licensing its patents that it’s got enough left over to reward investors with a rich 2.2% annual dividend….
“Since February 1992, the company’s chip licensing business model has made investors 10,077% richer—turning $10,000 into $1,000,600!
“Last year I’m happy to report that it richly rewarded investors again with another year of 25% annual gains.
“So it’s no wonder why Vanguard, State Street, and BlackRock, JP Morgan, and Goldman Sachs, together, own more than $1 billion worth of shares.
“Or why 31 top analysts not only just raised their expectations for 2014 but also expect this company to double the S&P 500!”
Well, have you figgered it? Yes, this is one of the old “big tech dinosaurs” that people talk about with some frequency as value plays — Qualcomm (QCOM)
And actually, QCOM has come closer than any other “big tech” stock I’ve checked out recently to catching up with its peak during the dot-com bubble years… and yes, if you had bought shares in 1992 at a split-adjusted 70-80 cents or so, you would indeed have a 10,000% return right now (actually slightly better, partly because Qualcomm has paid some dividends, but when you’re talking thousands of percent we can do some rounding).
And yes, QCOM does pay a dividend of just over 2%. And they’ve raised the dividend every year for a decade, so I suspect this is a dividend pick for Cabot, likely from the Cabot Dividend Investor letter. It’s a decent and fairly popular choice for dividend growth. Qualcomm is a large-cap growth company and it is in a sector where they have a huge entrenched business — but it’s also in an extremely competitive sector, so like all tech stocks there is the constant need to innovate and cut costs and boost their technological offerings … each chip set has to be faster, cheaper, stronger. Nothing new there.
It is nowhere near the revenue growth story that Amazon is, but the two companies are roughly the same size — in the $125 billion neighborhood, not at the very top of the heap in terms of business size but among the biggest 50-100 companies in the world, comparable to firms like Intel and Cisco. Definitely large, brand name, multinational corporations.
And QCOM is a very strong, very high margin company that generates a lot of cash. There’s some debate about where their business is going, but it could well be that the strength of their best business (their patent portfolio) persists for at least the next generation or two of smart phones. They are essentially the owners of the key patents for 3G CDMA phone connectivity, which means they’ve been able to command a strong royalty from essentially every smartphone sold over the last decade. The debate comes in when we talk about their future business, since they are not the one dominant player in next generation 4G/LTE connectivity like they were in 3G — so the leverage of those 3G patents and the royalties they provide will eventually die down, and their 4G royalties are not likely to be as big as the 3G ones have been. So far, most new phones are being made backward-compatible with older 3G networks, so it doesn’t really hurt yet… but eventually 3G will go the way of older digital and analog technologies and lose value.
So the question is, will Qualcomm continue to build up its LTE business, and will it do well in the more competitive chip space as they sell their Snapdragon and other processors into the latest phones and tablets? They seem pretty well positioned, but I’m certainly no expert on that marketplace. They are building up their chip business, building the core networking chips for popular products like the iPhone and mobile-friendly Snapdragon processors for other gadgetmakers, but the chipmaking and chip design business is very competitive and fast-changing… so as the chip business grows in importance, Qualcomm’s margins will probably continue to shrink. The margins are not bad, but the chip business with 60% (or so) margins can’t compete with the 85%+ margins the royalties generate.
QCOM did just increase their dividend with the last quarter’s release (story here), and they increased their buyback (they’ve spent billions buying back stock, more than $4 billion just last year, though they also — like most tech firms — see the impact of that somewhat muted by all the stock awards and stock options they give employees). It may well do twice as well as the S&P 500 over the coming year, I don’t know, but it would take a truly gangbusters year of economic growth for QCOM shares to rise by 50 or 100% — this is a dividend growth stock with good growth expectations, a slightly elevated valuation based on past earnings, and a pretty nice valuation based on the analysts’ average expectation that they’ll be able to grow earnings at 15% a year. They still have about $10 a share in net cash, too, so just like with the other stalwarts of “old tech” (like Microsoft and Cisco, for example) there’s plenty of room to increase buybacks and dividends at a measured pace even if they don’t grow earnings dramatically.
Exciting enough for you? Would this be your “stock of the month” for May? Let us know with a comment below.
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