Once in a while in the tech stock space we get a rare opportunity to make excellent gains from large, household names.
Most of the investments I recommend in my Tech Stock Jackpot service are in smaller companies that are on the verge of exploding. It is just easier for smaller companies to dramatically grow revenue. This is usually what leads to large stock moves: 1) Revenue grows faster than people were expecting and falls through to the bottom line. 2) Analysts base their price targets on a higher multiple of accelerating earnings
This CAN happen with a large and slower growing company but it is much more rare for two reasons.
Top line revenue just can’t grow as quickly as it once did and expenses are often fixed. It’s easier for a company like Yelp to double a $65 million quarter than IBM to double its $28 billion quarter. On the expense side, there can be large amounts paid out for real estate, inventory and administrative functions like Human Resources. However, when you find one of the gems that can both grow revenue and shrink expenses, you have a potentially explosive upside while being a safe investment. In the case of this company, you even get a dividend so you are paid to wait for the turnaround!
The company we are talking about is Intel. Intel has been talking about seeing a bottoming in the market for personal computers since March of 2013 but its management didn’t have the discipline to make the hard choices to restructure the business. This led to analysts getting their hopes (and earnings estimates) dashed as the company beat on the revenue line and missed profit estimates. As traders dumped the stock because of the headline miss, you should consider buying.
Wall St traders are short sighted with an attention span that doesn’t last through lunch. They push a stock around whether fundamentals are improving or not and are hamstrung by the fear of being wrong. If a position moves against them and they try to ride it out and are fired, it doesn’t matter if they are proved right the next day. So they shoot first and ask questions later.
Investors on the other hand, see a company beating the midpoint of its revenue range by 2% or $600 million! The demand is there in its core products and a new leg of growth is on the horizon because mobile is just beginning to contribute. In addition to revenue upside, last quarter, gross margin was four percentage points higher than expected. It was only the operating expenses that caused the miss, which is something that the new management team is addressing. On Friday, Intel confirmed that it would be reducing headcount.
Here you have are all the components to create dramatic growth in the share price of a large company. The top line is already growing ahead of expectations with a new leg of growth coming from new products. Expenses are coming down as the workforce is reduced and assets are realigned with growth initiatives. Lastly, expectations are low as the stock sold off after earnings.
Who doesn’t like small fast growing companies? They are easy to understand, fun to talk about and very profitable as stock investments. However, you can find outstanding growth opportunities in established companies as well, they are just more rare. Intel is one of these companies as revenue is growing faster than people expect at the same time that costs are about to drop. Add a 3.9% yield to the mix and you are being well paid to sit back and wait for the earnings explosion!
Tracking the Jackpot,
Tom Anderson.
