Seeing value in Microsoft, HP and Intel stock – at Yacktman and these Covestor models

The Yacktman Funds are run by a well known value-focused investment management team out of Austin, Texas that focuses on large cap companies with a history of strong earnings, competitive moats and strong balance sheets. The firm recently released its 1Q 2011 shareholder letter which discusses the perceived value opportunities in in “old tech” companies such as Microsoft (NASDAQ: MSFT), Hewlett-Packard (NYSE: HPQ), Intel (NASDAQ: INTC) and Cisco systems (NASDAQ: CSCO):

“Old Tech” – Down, But Not Down For The Count

Last quarter, Microsoft, HP, and Cisco all declined. In the last 12 months, Microsoft, HP, and Cisco are all down even though the S&P 500 is up more than 15%. We used the declines in these stocks to increase our weighting to this group of companies and add a small position in Intel in The Yacktman Fund only. We refer to this group of four companies as “old tech”.

Investing is largely about what you buy and what you pay for it. Today, with the “old tech” positions in the funds, we think we are getting good businesses at fire sale prices. A little more than a decade ago, these same stocks were overvalued, causing the returns for many previous shareholders to be poor even though the businesses produced strong results.

Today, this “old tech” group is now so disliked it sells at less than ½ the multiple of the S&P 500 even though the companies in this group exhibit business characteristics that we believe are superior to the average company in the S&P 500. The “old tech” balance sheets are some of the strongest around.

More recently, since 2007, the underlying businesses of our “old tech” basket have performed well and vastly outperformed the S&P 500, yet the stocks have dramatically underperformed. Each of the four companies in our “old tech” basket sells at less than 10 times our projection of 2011 earnings, net of the cash on the balance sheet. As long as the businesses on average do not go into unpredicted, sudden, and rapid decline, our investments should do well over time.

As of 5/2, the following Covestor models hold MSFT: