Are small company software stocks – especially medical technology companies -- a safe, even profitable, haven for investors these days? Could be – especially if you’re looking to forego higher-risk plays like oil and financials – that your focus should be on smaller med tech companies, one institutional investor advises.
“Two great investment debates are occurring at this moment, one over financials and the other over oil – and I choose not to get involved,” says Manny Weintraub, a former Managing Director of Neuberger Berman and Founder, Principal, and Portfolio Manager of Integre Advisors. “I’m telling my clients that it’s not a good time to invest in either of these sectors.”
“Distressed banks can go up 30% to 40% in a day. I am not buying them because if they go up, it will only be due to a government decision not to nationalize them. You can’t make a rational investment decision when the outcome has nothing to do with the fundamentals.
“There is also the debate over commodities and oil, which common sense says will come roaring back once we get out of this recession. But my experience has been that once something is common sense and everyone knows something is going to happen, it’s already priced into the markets. So I’m telling my clients we have minimal exposure to oil.
“The valuations on stocks have come way down over the past 10 years.
“Starting at these low prices, the dividend yield on the S&P 500 has gone up substantially. Ten years ago, the yield was 1.2%, and now the dividend yield is 3.6%. If you have a 5% return from profit growth over the cycle and a 3.6% dividend yield, you have an 8.6% return. That’s really very competitive – and tax-advantaged.
“I’m telling my clients: The valuations are good. The outlook for the next 10 years is good. Don’t try and take big risks. You don’t need to take big risks to get decent returns. We’re seeing a lot of opportunities in smaller companies. We’re investing in software, medical technology, and cash-rich small companies. Basically, we’re going with a prudent asset allocation, and having diversified assets and equities are part of it.
One larger technology company, in the cellular field, is having a tough go of it these days. Sprint Nextel has come out with its Q4 earnings numbers, and it’s still losing money. The good news? It’s not losing nearly as much money as it did during the same period one year before.
To the numbers: For the fourth quarter, Sprint lost $1.62 billion, or 57 cents a share. But compare that to the $29.45 billion, or a staggering $10.36 a share, that Sprint shed during the fourth quarter of 2007. According to company statements, the 2007 Q4 losses were due to some large write-downs the company was forced to take related to its merger with Nextel. But for Q4 in 2008, Sprint was only forced to write down $1 billion.
But as I said, times are tough and Sprint is nowhere near out of the woods yet. The company’s revenue levels continue to dissipate, with Sprint revenues off 14%, to $8.43 billion, in earnings for the quarter. The cell giant also lost 1.3 million subscribers in Q4, most of those contract-customers – the bread and butter of the cell phone industry. It’s almost weird. Times are tough, but study after study shows that consumers will give up a lot of things, but not their cell phones. Their wireless devices usually show up second on these surveys (after the Internet) of consumer items and services they refuse to do without during a recession.
Worse, AT&T (thanks to the iPhone) and Verizon (thanks to the new Blackberry’s) keep adding customers; 2.1 million and 1.4 million, accordingly for the quarter. I’m not saying that the cell phone business is a zero sum game, but it’s no coincidence that AT&T and Verizon gain customers and Sprint Nextel loses them in the same quarter. It’s not like people are dropping their Sprint phones and declining to replace them. They’re buying new Blackberry’s and iPhones and signing contracts with AT&T and Verizon.
Dan Hesse, who took over as CEO in 2007, and the new public face of Sprint Nextel in TV commercials and radio, web and print ads says that Sprint just needs more time.
"Subscriber losses and revenue declines are still unacceptably high," he said in a conference call with analysts. "But it takes time for perceptions about our customer care and financial stability to catch up to the reality."
Hesse has already rolled out a $99 per month “Simply Everything Plan” and he’s not stopping there. This month Sprint has announced that it will offer laptop-level 3G services to its cell phone customers at a price of $50 per month. And, Boost Mobile, Sprint’s pre-paid service via T-Mobile, recently rolled out a flat-rate, $50 per month plan for recession-weary customers.
Will it be enough? Hesse thinks that the wireless industry is well-positioned to survive the rough economy. He may be right. But the reason that Verizon and AT&T are doing so is due to superior products and service.
If Sprint Nextel can’t match up, then, in the end, the math won’t add up either.