PowerTrend Brief: Looking for Growth Amid the Would-Be PC Value Trap

Last week, I spoke at the Wall Street Perspectives Lecture Series 2013 at the New Jersey City University Graduate Business Program. The crowd was great, as were the questions, some of which were asked by the student investment team that won the University of Dayton’s 13th annual investing competition. All told, it was a fun night and my thanks go to Dr. Bernard McSherry, a long-time governor with the New York Stock Exchange, for inviting me.

While I spoke to the students and Wall Street veterans that attended the lecture about PowerTrend investing and some of my Great Eight PowerTrends, I want to share with you some of the questions asked by the audience. In particular, there was one question that not only summed up the essence of one of my PowerTrends that we increasingly see in our lives each and every day, but the query also allowed me to share how I go about avoiding potential pitfalls and large losses when investing.

The question I’m referring to was whether or not I thought Microsoft (MSFT) shares were a “buy.”

Well, I said to the audience, at this point we already know the company’s new Windows 8 is not selling well. We also know that despite Microsoft’s strong position in the desktop PC market, its position in smartphones and tablets is far less strong. That situation concerns me because of the shift from PCs to tablets powered by Apple’s (AAPL) iOS operating system (OS) and Google’s (GOOG) Android OS. Not only is Microsoft seeing demand for its core product fall, but its position in the product taking its place is particularly weak. It is not a good combination.

Topping it off, that afternoon we learned that PC demand is falling far faster than previously thought. More specifically, first quarter PC shipments fell 13.9% and shipments for desktop systems have been nearly cut in half during the last 10 years. In other words, the PC is not a growth market anymore and longer term it is probably going the way of the tape deck and the VCR.

But as I pointed out to the audience, this situation was hardly a surprise. For starters, consider the 247-page brief that Dell (DELL) filed recently with the Securities and Exchange Commission that painted a very dire picture of a PC-centric company that missed not only Wall Street expectations but its own internal revenue projections during the last several quarters. Also hitting Dell, as well as Hewlett-Packard (HPQ), are the new Google Chromebooks from Samsung, Acer and others. Since these devices have price points between $200 and $350, modest adoption and market-share gains from tablets could put even more pressure on Dell’s PC business. Keep in mind that most PCs sell for $500 to $1,500, while the initial out-of-pocket expense for a smartphone runs as low as $99. Tablets sell for $200 to $300. To me, that pricing indicates that PC manufacturers, as well as Microsoft, are on the wrong side of this equation.

To be fair to Microsoft, it does have some great assets among its product portfolio — Skype, X-Box, Office and some others — but they don’t sufficiently offset the risk with the continued decline in the PC market. If Microsoft had a better position in the smartphone and tablet markets, my view might be different. But with low-cost manufacturing companies like Huawei and ZTE gaining share with Google Android-powered products, it doesn’t look good for Microsoft.

My conclusion, as I told the assembled, was that I saw little reason to own Microsoft shares because it was not riding the Always On, Always Connected PowerTrend wave. The company had failed to evolve its business amid changing consumer and business preferences. One quick hand went up and said “but aren’t the shares cheap?” Cheap they may be, I replied, but if the earnings part of the price-to-earnings multiple is falling, the shares will get far more expensive or the share price will collapse — neither of which is good when you are assessing whether or not to buy a stock. It is better to look for a company that is capitalizing on the smartphone and tablet share gains, as well as the other markets that mobile carriers are targeting to grow their data revenue streams. More analysis on that opportunity can be found in the May issue of my investment newsletter PowerTrend Profits.

Other questions from the audience included:

• What do I read to collect all the data points I used? There are too many sources to name here, but the answer is that I use anything and everything I can get my hands on.
• What did I learn from a recommendation that went bad? Don’t become emotional and think you can will the position to go higher — it is better to be disciplined, cut your losses and move on.
• Do I prefer Apple, Nokia (NOK) or Blackberry (BBRY) shares? Given the increasingly competitive landscape of the smartphone market, none of them excite me.
• Do you talk with companies? Not only do I do my homework on the companies I recommend, I also read up on their competitors and customers to make sure I understand what is really going on. That research means talking with investor relations people, as well as the management teams. Another big help is PowerTalk, my weekly conversation with CEOs of public and private companies, as well as other thought leaders. I recently spoke with Manish Chandra, the CEO of Poshmark, and that conversation hammered home the new frugality or, as I call it, Cash Strapped Consumer nature of the American female. Because of that PowerTalk, the dismal March retail sales figures were not a shock to me at all. If you’re not listening to the conversations I’m having in this free service, you should be!

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

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