Author: Daniel Beckerman, Beckerman Institutional
Covestor portfolio: Flexible Value
I visited a Verizon store recently, as my wife was looking for a new phone. She had little desire for a smartphone and felt as that a regular cell phone without the web would best suit her needs.
When we entered the store, we were struck by the large interactive displays featuring music, GPS and videos utilizing the smartphones. We walked past the vast collection of Droid (MMI), Apple (AAPL) and Blackberry (RIMM) phones and asked to see the regular phones. The Verizon represented looked puzzled, but nevertheless directed us to a small area in the back of the store where there were two basic phones. One was a rugged phone that featured walkie-talkie functionality, so that perhaps a worker could quickly communicate on a job site. The other was an old flip phone design that looked like it was not redesigned since the nineties. Why put R&D into a section of the store that only attracts us - or someone’s great grandmother?
After seeing several nine year olds checking out with their new smartphones, my wife capitulated and bought the new Droid.
Almost everyone seems to already own or is currently considering owning a smartphone. More people are researching, shopping, listening to music, reading, and networking on the internet and living virtually connected lives (everywhere) than ever before.
Isn’t this the technology revolution playing out that people were betting on in the nineties? Some wonderful and innovative growth companies are at value prices. It is amazing that economic cycles and investment cycles can be far disconnected. In the mid-nineties, technology stocks experienced a powerful boom and ultimately a bust. Now, fifteen years later, the technology boom in the real economy is just starting to pick up steam.
In this fast paced world it is vital for investors to think about how the businesses that they own fit into the rapidly changing landscape. Will they profit from it - or will they stumble because of it? Once-successful businesses like Borders, Hollywood Video, and even my local travel agent became extinct in the wake of Amazon (AMZN), Netflix (NFLX), and Expedia (EXPE).
Despite our requirement of buying business at significant discounts to our assessment of fair value, we far prefer a business that is poised for future growth versus a really cheap company in a shrinking business. This is one of the reasons that traditional value metrics such as P/E ratios alone are not enough to screen for a great investment.
Many wonderful and innovative companies are at value prices. For example, our model includes STMicroelectronics (STM), Johnson Controls (JCI), Apollo Group (APOL), and Google (GOOG), among others. Our top holding at this point is Cisco (CSCO) which recently announced better than expected earnings and traded sharply higher on the news.