I haven’t written much about Amy Calistri’s newsletter, Stock of the Month from StreetAuthority, but her latest teaser caught my attention — and it’s a stock she says she’s buying for her “real money” portfolio this afternoon, so it’s at least timely.
Stock of the Month is currently one of the top-ranked newsletters over at Stock Gumshoe reviews — Calistri had the good fortune to launch her newsletter near the bottom of the market, and so didn’t come in with the baggage of having picks that collapsed in 2008 and early 2009, but still, having happy subscribers is a positive even if the letter hasn’t necessarily been tested in a really nasty market. So what’s she teasing us about today?
“I’m Buying 50 Shares of This Diversified Tech Play for My $100,000 Real-Money Portfolio on
Wednesday, March 3, 2010
“Right now 10 of the 12 stocks in my Stock of the Month portfolio are making money for my readers, 9 with double-digit gains
“I think this one is the next winner…”
This is the pick that she just featured in the March issue of the newsletter, apparently, so at least this isn’t one where the subscribers have already seen 200% gains and the editor thinks it has “room to run.”
Calistri apparently went looking for a play on the tech sector recovery — here’s how she puts it:
“A number of recent earnings announcements have indicated to me a healthier tech sector. In light of this broad-based recovery, I’ve been on the hunt for a nice, diversified tech play. And, I believe I’ve found it….
“And, right now you can still beat me to the punch and buy this stock before I do — but you have to hurry.”
Calistri, to my eye, has generally focused on larger “blue chip” or “value” type stocks in the past, though she also buys a lot of closed-end funds and ETFs. The link that she provides for verifying the “real money” brokerage account indicate that as of last month she owned Vodafone (VOD), Sally Beauty (SBH), PowerShares Global Water ETF (PIO), PowerShares Global Agriculture (PAGG), Olin (OLN), a closed-end equity and convertibles fund (NGZ), Medicis (MRX), an Asia-Pacific fund (FAX), Hasbro (HAS), Diageo (DEO) and Automatic Data Processing (ADP), with Hasbro, the agriculture ETF, and ADP being the biggest “bets” so far.
So who is she adding to that august list today? Well, we get a couple paragraphs that are seeded with one or two little clues … here you go:
“Here are just a few of the reasons why I think this stock is a strong buy right now:
“Diversification: This company’s diversified interests have allowed the company to navigate the economic downturn with little trouble. In 2009, the company reported yet another consecutive year of double-digit earnings-per-share (EPS) growth and a record net income. The company’s gross profit for the fourth quarter of 2009 was the 21st increase in gross profit in the last 22 quarters.
“Steadily climbing dividend: This company pays a smallish dividend — but one that has continued to climb. In the last five years, they have boosted their payout by +200% and, the company recently raised its quarterly dividend yet again.
“Rumors of a pending stock split: Rumors of a pending split of this company’s stock are swirling. While a stock split doesn’t fundamentally change an investment, a split of this company’s stock would result in it’s share price at under $100. Retail investors are less intimidated by stocks that trade under $100, so a split could potentially attract more buyers.”
Not a lot of clues, certainly, but if we use what we have (21 “gross profit” increases in 22 quarters, consecutive years of double digit increases in earnings per share, dividend up by better than 200% in five years, stock price over $100), we can come up with a pretty good answer:
International Business Machines (IBM)
Not exactly a shocking pick out of left field, eh? You may well have heard the old axiom, “Nobody every got fired for buying IBM,” but I think that originated with purchasing agents who were confident buying equipment from the leader — still, it’s also probably true that no money manager ever got fired for making the “safe” choice and buying a historically dominant company like IBM, one of the bluest of the blue chips.
IBM is also, of course, huge — market cap of about $170 billion, so we can be quite sure that Amy Calistri’s addition of this stock to her portfolio is not going to cause the shares to spike, and neither would a sudden influx of thousands of retail investors (all of whom probably own lots of IBM in their index funds or mutual fund anyway). It’s not the biggest company in the country, though it’s in the top ten — and it’s also not the biggest tech company, being in the same neighborhood as Google (GOOG) and Apple (AAPL), and quite a bit smaller than Microsoft (MSFT) … but it is the second most profitable tech company in the world after Microsoft, with $13 billion in profit last year (that’s twice Google’s profit, and 4X Apple’s — and not far behind MSFT’s $14.5 billion).
And IBM, despite a remarkable long-term growth record, was probably the most significant big tech stock that led the way in “maturing” and paying a dividend, which they’ve been doing for decades as they evolved with the times from a mainframe computer designer, to a personal computer maker, to a services company. Today, though they still do almost everything in tech aside from making high profile consumer products, they’re largely considered a broad-based tech consulting company, and they have their fingers in almost every part of the global economy, and gobble up tiny firms at a rapacious rate — I think they’ve already made close to a half-dozen small strategic acquisitions in just the last few months.
The dividend has often been so tiny as to be inconsequential, but it has been consistently growing, they’ve raised the dividend every year for at least a decade (didn’t check all the way back) and it now, like Microsoft’s dividend, comes in at a respectable “almost 2%” yield. IBM is also one of the few big tech companies to carry debt, though it’s certainly not a huge amount, it has been shrinking, and most of it is just debt that they carry to finance the purchases by their customers (total debt $26 billion, or $12 billion if you back out the net cash — less than 10% of the market cap).
IBM has trailed the S&P 500 over the past year, but that’s largely because the stock didn’t fall as hard as the index and therefore didn’t bounce back as hard — since the tech crash, IBM and the broad index have traded in pretty close sympathy over longer periods, not a surprise since IBM is large and diversified and is a notable part of the index.
And actually, you can argue that IBM is the most important stock in the country — that’s because the only number that many folks ever watch is the Dow Jones Industrial Average (despite the fact that the S&P 500 is a far better representation of the market), and, thanks to the nuttiness of the price-weighted Dow, IBM is by far the largest component in the DJIA at over 9%. The largest company in the country, and arguably the largest in the world, ExxonMobil, makes up only about 5% of the Dow, and Microsoft only about 2%, so you can see that to a significant degree, as goes IBM, so goes the market — or at least, the public’s perception of the market.
So it’s hard to say “blue chip” without thinking about IBM, and it’s hard to argue that someone shouldn’t own IBM, much as it’s hard to argue against holding index funds. And since they’ve really become much more of a consulting and services company than a hardware (or even software) firm, it’s no surprise that their margins are impressive — they have margins that rival Microsoft’s gold standard, and their return on equity is tremendous at better than 70%, even better than their large tech consulting competitor, Accenture.
They’re not, however, going to get the dramatic revenue growth that we all probably conjure up when we imagine the perfect tech company — IBM is growing, but the top line revenue has recently been growing at about 4%, and the last quarter was only 1%. Four percent sales growth is what analysts expect to see continue, though they see earnings growing more than twice that fast thanks to their faith in IBM’s ability to continue squeezing higher margins out of their software and services businesses and “managing costs” (ie, firing people). That 21 of 22 quarters number from the teaser, after all, was not just increases in gross profit, it was increases in the gross profit margin, which is far more impressive as each dollar of sales has gradually become slightly more profitable almost every quarter.
The shares dipped a bit when they released their quarterly earnings in January — the numbers “beat,” but investors had already driven the price up in anticipation, and the company issued a cautious outlook for 2010 that deflated expectations a bit. The earnings were, however, widely seen as an indicator that corporate tech spending is starting to recover, and the stock has slowly been working its way back up in the weeks since.
And that’s about all I can work myself up to say about IBM — it’s a great company, obviously, and has been a great stock for decades. It might even grow faster than the market, and shareholders were probably pleased during the crash that it simply fell more slowly, but it’s hard to imagine that IBM will be a fortune-maker at this point — like any large cap stock, it’s facing the law of large numbers: growth gets harder and harder, and it’s hard to “move the needle.” I wouldn’t be surprised if we eventually end up with IBM being the first US trillion dollar market-cap company, especially given their proven staying power over more than 100 years in a fast-evolving industry … but I also wouldn’t be surprised if it takes decades to get there.
If you’ve got a feeling about IBM, feel free to share with a comment below.
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