The strong performance of global stock markets over the last few years has left investors struggling to find attractively priced opportunities.
A sector with particular stand-out performance is US technology, which has been dominated by high-profile, new-economy names such as Facebook, Amazon, Netflix and Google (now called Alphabet).
Commonly known as the FANG stocks, these business’s performance has been driven by the long-term, secular trend of the increasing impact of technology and communication on our everyday lives.
While we view the FANG stocks as expensive today, our research is finding significant value in some traditional US technology companies, such as Cisco, IBM and Intel. These businesses enjoy many of the traits that we look for in an investment such as good market position, a strong and sustainable margin profile, robust balance sheet, cheap valuation and an attractive starting dividend yield of about three per cent.
These companies have been overlooked by investors because they have legacy businesses that still make up significant proportions of the group profits but which are either not growing or are in long-term decline. On closer inspection, however, it becomes apparent that these ‘old tech’ businesses are slowly transforming themselves and, in time, like the FANG stocks will benefit from the growth in connected devices, connections, data analytics and e-commerce.
Cisco is transitioning its business model away from a traditional ‘book and ship’ every quarter model to a combination of hardware, software and recurring revenues. It is also now a global market leader in the fast growing software security market.
IBM has created a strategic imperatives division that is growing at between ten per cent and 15 per cent a year and now represents over 40 per cent of group revenue.
Long-term, IBM hopes to be able to monetise its significant investment in its supercomputer Watson, which combines artificial intelligence and sophisticated analytical software for optimal performance as a ‘question-answering’ machine.
Today, Watson is predominantly being used in the healthcare sector providing quicker and more accurate diagnosis for patients. Over time, this will be rolled out across many different end markets. Intel is trying to evolve from a personal computer company to one that powers the infrastructure for this increasingly smart and connected world.
The main strategic goals for Intel include the development of its data centre business, where its microprocessor chips help power the cloud servers of Amazon and Microsoft, as well as its Internet of Things division, where one of the growth drivers is powering the computers running autonomous cars.
Additionally, these businesses may also stand to benefit from the policies of Donald Trump, the new US President. They each have significant amounts of cash on their balance sheet, with the money currently held outside the US for tax purposes.
A change in legislation may allow companies to bring this cash back to the US for a one-off penalty. For example, Cisco currently has $60 billion of gross cash that is currently held overseas. This represents 40 per cent of the market capitalisation of the company. If this cash can be successfully repatriated, we would expect shareholders to benefit from incremental returns through increased dividends or share buybacks, or even further investment in the business.
These businesses would also all benefit from a significant reduction in the corporate tax rate from 35 per cent currently to a proposed level of 15 per cent.
David Keir is executive director at Saracen Fund Managers and co-manager of the TB Saracen Global Income and Growth Fund.
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