Your theory for why QCOM lately is holding up better than WIND may have merit, but it is hard to say. Without doubt, investors are moving increasing into defensive stocks as this correction progresses, and larger, more conservative price-to-sales type stocks might be considered safer, certainly according to recent market behavior.
However, QCOM does not have the characteristics of a safe investment, according to most investors definition of safe. In my mind, the company is an absolute steal at $58, and at a trailing PE of 212, but only if you can handle a very rocky ride. QCOM was finally let out of the starting gate last fall when CDMA systems began to proliferate and the over-riding risk of technical failure changed abruptly to mere business concerns about profitability, market share and growth. You could argue its value today is 10 times what is was one year ago. But two years ago you would have had to pay as much as $54 for the stock in anticipation of great things to come. Today you can buy it for only slightly more, so it really hasn't appreciated as much as indicated by its recent performance. Its support level (subject to Stephen's TA concurrence) is extremely strong at $54, but if broken ...
QCOM does face very real business risks dealing with carriers, who are at the early stages of a lengthy period of adjustment of almost unbelievable magnitude due to deregulation coupled with breath-taking changes in technology. QCOM finds it necessary to finance infrastructure and probably handset purchases by carriers, many of whom are extremely weak financially and are subject to failure - like what just happened to Pocket Communications today. Remember that carriers greatly subsidize handset costs, so not just the costs of infrastructure are needed up front to get a PCS going, handset costs also are not fully covered by subscribers. The day one of these carriers defaults on a few hundred million dollars of financed infrastructure and handsets is the day QCOM will look much less safe despite a relatively low price-to-sales ratio.
Nevertheless, if you can handle temporary setbacks, buy a significant position in QCOM because, as Ramsey knows, QCOM is perfectly situated with a newly forming, unstoppable CDMA franchise that will last for decades. While voice wireless telephony fully justifies the market appreciation of the stock, its real value lies in the incredible synergy that will fuel explosive growth from controlling so many balls juggling around the CDMA wireless space. Within ten years, income from data applications will dwarf income from voice, and the income from voice will be sizable indeed. QCOM is an obvious ten-bagger and should be owned by the long-term investor.
So, how do all these facts and observations get balanced in a market correction? Beats me.
WIND is beginning to dominate the most important sector in the history and future of computing, creating a franchise that will last for generations. The company is executing to absolute perfection. The price of future earnings is extremely cheap. The only arguable downside would be if Microsoft realized its future depends on a successful embedded systems strategy and moves aggressively into the sector without bothering to buy WIND - and only if Microsoft does this starting immediately. All other competition in this winner-take-all economy is being held at bay.
In a market where software companies are disappointing and dying like flies, how should the market treat WIND - given its "high" trailing PE? With all the high-flying momentum players getting killed, will they jump ship because of a preference for small trailing PE ratios, large safe stocks or low price/sales stocks? I don't know.
Before you jump to conclusions about the safety of large stocks, think about the following: Next to the crash in 1929, one of the longest periods when stocks failed to regain their previous high was from 1996 to the end of 1982, or 16 years. Actually this is not exactly true. The only stocks that failed to regain their previous high during this down period were the blue chips in the DOW.
Who said that large is safe? The only thing that is safe in stocks is earnings. BORL showed earnings strength during the 1990 recession and was rewarded with a 500 percent gain for the year, a time when most stocks were tanked. When all about you are failing, the market will reward the overachiever.
If you can prove that large companies have an earnings advantage over small companies, then large stocks are safer. Otherwise, neither history nor logic warrants consistent special treatment of large stocks.
Allen |
