Here is a small account of what I have been doing recently on the investing front:
During the last weeks I have been buying on several occasions Applied Materials (AMAT). I am very surprised with the quality of its management and its industry. AMAT is the technological backbone of modern civilization. It is basically in the business of selling machines that build semiconductors. It has small competition, being the biggest company in a extremely hard to copy business, its durable competitive position is strong. It’s relatively unknown among investors but the fact is that basically any computing device from the Ipad to anything that has a chip inside has been partially built with AMAT machines. AMAT does not care much about what happens between hardware competing companies like Intel, Dell, Apple, Hewlett Packard, or Microsoft. It will always sell its machines to whoever the survivor is. It is very well positioned due to the “mobile revolution” and has strong wild cards in new technologies like solar energy, since it also sells machines that make solar chips.
The company seems cheap on a historical basis. Market participants do not appear to like it, probably due to the volatility of its business. The business is volatile because chip makers, like Intel, Samsung, etc.. do not buy AMAT’s machines on a constant or predictable basis. Personally, as long as in the long run it does well, I do not care about volatility. On the contrary, I use it to my favor to buy or add when prices get low.
Besides AMAT I have been adding Dell. Dell has done a good job at diversifying itself from the computer business. Its personal computer income is quite small now. Enterprise computing is the biggest part of its hardware sales. Software services are becoming more and more part of its income. The CEO/Founder is someone I admire, he is a big stock holder and has been adding at prices slightly above current levels. The market is not in favor of Dell, I think the reason is because it has an image of being a computer hardware company. And the market thinks that PCs and Notebooks will be replaced by other devices like tablets or IPads. I have my doubts about that and even if it happens I am very comfortable with the fact that Dell derives most of its income from services nowdays. It has done a remarkable job at profitably transforming the company in a very short time.
I have also added WDC. WDC is a company that I know well. I have basically made quite some money with it two times in the past, between 2007 and 2011. Both times buying between 13 and 25 and selling between 38 and 45. So as you can deduce, the stock price is very volatile. I hope this 3rd time I’m as lucky. Even though I now basically duplicated my small position, the amount invested for the time being is much smaller than in the past.
WDC is in the Hard Disk business, the market is bearish on it’s future. Basically they think SSDs will replace traditional hard disks. SSDs are hard disks based on semi-conductors, with no mechanical parts. That happening, and at what speed, is something very debatable. The possibility of hard disks extinguishing in the personal computer area is higher. But hard disks are by far the cheapest way of storing data. And storage, wherever it is, is a huge and exponentially growing necessity. There is no capacity to satisfy the enormous demand of storage with other technologies. And that capacity does not get built overnight, and is not cheap. Tape storage technology was also doomed to die. But meanwhile it lasted for decades and still is present.
As I see it storage is tiered by using different technologies depending on the access frequency to the data. Critical business applications use SSD as storage when data needs to be retrieved fast, like in databases used a lot. But simultaneously most of the data is stored in the cheapest way possible and that is in traditional disks. I myself like having a fast computer so I like the idea of having an SSD as my main working disk but on parallel I have several traditional disks to store all my data like films, music, or photos.
WDC is one of the biggest stocks in Robert Rodriguez’ portfolio. And it’s the only company he has not reduced lately. On the contrary, he has been quite aggressively adding in the last 8 quarters. Rodriguez is one of the 2 or 3 investors I care about what they do. WDC is, apart from him, unknown among value investors.
WDC is at a low price on valuation terms, in 4 or 5 years it can make back all its market capitalization. It has strong cash flows. It has bought Hitachi hard disks operations. There are only in practical terms just 2 companies left on the sector. So the traditional risk of high competition and price war is lower. The other competing company is Seagate, whose management I disrespect and whose balance sheet is not nearly as pretty as Western Digitals.
WDC is already in the SSD business and is investing to expand it. Sales of traditional mechanical hard Disks can disappear one day, but if it’s not in 3 to 4 years, the investment would be very worthwhile. And even if they disappear, WDC and Seagate have a big chance of remaining in the storage business adapting to whatever technology comes as replacement.
PD1: Occasionally I take time to write about my investments. The reason is because I spend much more time studying and reading about them than writing. But you can always see the changes to my portfolio, that’s updated instantaneously.
PD2: On a personal note: I just saw a good prison movie called A Prophet (Un prophète, in French). I recommend it for the ones who like the gender. I have a big movie collection, so feel free to contact me it you want to trade.
PD3: Some more thoughts on AMAT.