Freedom Lawyers of America

Computer companies still no 'buy'
Plus: Mining conferences to benefit from gold's appeal

By Thom Calandra, CBS.MarketWatch.com
Last Update: 11:57 AM ET Aug 13, 2002
SAN FRANCISCO (CBS.MW) -- It's all "in the eyes of the beholder."

Mention gold as an investment and lines are firmly drawn in the sand: love it or hate it. No quibbling. Mention the largest 29 U.S. computer and computer peripheral companies and most of us want it seven ways to Indiana (pick one): love the companies, hate the stocks; hate the industry but have some favorites, anyway; love the companies and the stocks, but don't buy them just yet.

Applied Finance Group in Chicago, an independent researcher, mostly takes the freeway to Indiana: It thinks most of the computer companies are still way too expensive against other technology companies but sees a few as bargains.

The small research firm has a good track record. The most undervalued and overvalued companies tagged by Applied Finance Group in all industries have beaten or lagged their peers' financial performance by 4 and 6.8 percent, respectively, on an annualized basis since 1996.

Research director Rafe Resendes and his Applied Finance Group rate the computer companies in part by their economic margins, a figure that measures how well a company's returns exceed its costs of funds (what a company pays for debt and equity capital). Other criteria in the firm's first specific industry research report -- companies such as Cisco Systems (CSCO), Emulex (ELX), Network Appliance (NTAP) and EMC (EMC) -- include sales growth, cash-flow margins, asset efficiency, relative returns against industrial companies, price momentum and quality of management.

Most of the investing public won't get to see the Applied Finance Group report. It's for private clients, and it's unlikely to appear on the pages of Barron's financial magazine. "It is interesting in that a number of our thoughts seem to differ to a large degree relative to the picks from Barron's," Resendes tells me. "We do agree with Barron's that tech is finally reasonable but disagree with the specific picks."

The financial magazine just branded 20 tech companies as "buys" or "sells" according to stock market value. See the article: "Gems can be found in tech stocks."

"Cisco in Barron's was a 'buy' because it is cheap, while we have it as solid 'sell' because it is expensive," says Resendes. "That is what makes this business fun; we get to beat up on helpless little guys like Barron's by being smarter," he says with a wink.

"Similarly, they liked Hewlett-Packard (HPQ) and we say just so-so," he says. The last "Cisco-is-expensive call" from Applied Finance Group came in July 2000, when the now-$13 shares were selling to America at the price of $65.

The meat of the new report is the section on economic margins. Are a company's returns beating its cost of capital? Applied Finance Group notes that economic margins for computer and peripheral companies are near zero. "Firms are finding fewer positive net-present value projects. As such, the market has responded with negative relative returns," the report says.

Computer companies' economic margins on invested capital hit 8 percent in the mid-1990s when Cisco and others were scooping up competitors and using their assets to hyper-pump sales. Resendes expects economic margins to start rising again by 2003 as smart CEOs and CFOs dump their broken units and slash costs.

Other reasons to be wary of the computer companies this year: Industry sales growth reached a 13-year low in 2001. Industry assets contracted 2 percent. Sales growth, cash-flow margins and asset efficiency are at a 14-year low for computer and peripherals makers.

Aggregate cash-flow margins for 2002 are about 8 percent for the group vs. 12 percent in the middle and late 1990s. Look for a turnaround in the next year or so "as companies cut costs and wait for sales to rebound along with the stagnant economy," Applied Finance Group says.

"In general, we feel that the computer and peripheral industry looks expensive relative to the entire technology sector (750 companies, including Microsoft, Intel and Oracle), and all industrial service companies (3,000 companies)," Resendes said Tuesday. "I would not want to be holding most of these companies."

Of course, there is that freeway to Indiana, or wherever. Resendes and his team have "buys" branded on a select few computer companies. They include American Power Conversion (APCC), IBM (IBM) and Ingram Micro (IM).

Big gold shows ahead

Gold's summer has been almost as rough as the one endured by the overall stock market. The metal ran up to almost $330 an ounce, then U-turned back to $300. An August comeback puts bullion at $315 an ounce, a level that almost certainly will prove to be a bargain later this year and next.

Two of the best gatherings of gold-mining companies and the folks who track the sometimes adored and mostly loathed industry are ahead of us. The New Orleans 2002 Investment Conference in November will feature speakers such as Richard Russell of Dow Theory Letters, mutual fund legend John Templeton and veteran newsletter analysts Bob Bishop, Adrian Day, Brien Lundin and Ian McAvity.

The New Orleans show usually pulls in wealthy folks looking for alternative investment strategies. The meat and potatoes of the New Orleans lineup are the grizzled newsletter editors who are devoted to natural resource companies, through good times and bad. The New Orleans show has been around since the mid-1970s. See the New Orleans lineup.

Another show for those who prefer hard assets to paper stocks, this one free to investors, is the New York Institutional Gold Conference. The gathering is in its 15th year and brings together hundreds of large and small gold, silver and diamond explorers and some of this age's best contrarian thinkers -- like James Grant, John Hathaway, Rick Rule and John Doody.

The New York show is in September, traditionally the beginning of the gold and jewelry holiday buying season. Like the New Orleans show, the New York show is essential for those who honor the credo of capital preservation in rough fiscal times. See the New York lineup.

Conference organizers report both shows are expecting record-breaking attendance, thanks in part to gold's rise above $300 an ounce earlier this year. "We're absolutely swamped with registrations," says Erin Garic at the Jefferson Financial, which stages the New Orleans show. "We haven't had this much interest since back in the heyday (of the 1970s) when gold went through the roof."

The New York conference bills itself as the largest mining investment conference in the United States. "Many more professionals investors are interested in the New York conference and have registered than in previous years," says Sandy Lawrence, president of International Investment Conferences. Lawrence expects a swarm of individual investors, as well.