02/2/14

“Let them eat iPads”

I enjoyed recently reading an article on zerohedge.com entitled “Let them eat iPads: 14-Years of Data Debunk Fed’s Inflation Shortfall Canard”. The “Let them eat iPads” quote comes from 2011 when William Dudley, then Chief Executive of the Federal Reserve Bank in New York was challenged by the public when he tried to explain that a fall in the cost of technology such as iPads offset increases in energy and food prices. When someone pointed out “I can’t eat an iPad” Dudley was ridiculed and Marie Antoinette was paraphrased.

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In the last year alone the valuations of Facebook have gone up 109%, Twitter 147% (without any notable earnings!) and Apple 26% (despite recently pulling back to only 10% for the year).This compares to energy, agriculture and food retailers that have remained relatively flat.

What is going on??

As an investor (rather than a speculator) I expect (perhaps naively) for my money to be spent to help grow the companies that I invest in or at least let them manage my money in real investments in return for a dividend which I can reinvest as necessary to achieve compound returns. This is why I have never invested in the Tech sector. Rather like fashion we see that the latest fad has resulted in everyone following each other into these stocks without any logic. At least ‘bowl’ haircuts in the early 80’s had practical value by being cheap and easy to administer. I have no justification for perms or leather jackets though.

Apparently, as in fashion, tech investors are cyclical. I hope for the sake of at least a few generations that memories last slightly longer than 10yrs before we bring back 70’s and 80’s fashion. Buying companies on PE ratios of >40x (let alone 128x which Facebook was at the time of writing) or on valuations based on “numbers of users” is generally not a good idea. Google (although free to use) was at least set up as commercial businesses from an early stage and therefore has a culture of making money as well as being a novel innovator. Even then I would not buy it on any valuation. At a PE of >30x I would still consider it slightly expensive although it is one of the few companies in the S&P 500 that continues to grow revenue and earnings per share.

The problem is that this is self perpetuating. If you invest in tech companies and they end up with large balance sheets, they are inclined to reinvest into other tech companies. For the most part tech entrepreneurs have little experience of M&A or running a listed business so they rely on employing good senior management to grow the company. However ultimate control and decision making is in the hands of people with little corporate management expertise so they are likely to be more conservative and hoard cash. Why trust a 30yr old billionaire to allocate your cash for you? I am all for increasing networks and maintaining in touch with people. Socially I’m not sure it is healthy the number of people you see nowadays staring into a screen, oblivious to anything around them. Whatsapp was bought for $19bn with ~50 employees, I’m sure making their margins enormous……oh wait hang on they aren’t……but they could be.

I do not claim to be able to look into my crystal ball and predict the future and anyone that believes they can in my opinion is a fool. It’s my hope that the recent dot com billionaires use their new found wealth to help fight food inflation, pollution, emerging market infrastructure and energy efficiency. Inevitably it is in their interest to do so as much as anyone else’s. In the meantime I as always will be looking to invest in good value companies that are unloved by recent trends in the market and companies with tangible earnings and well covered dividends.

If I was invested in these companies I would be looking to take profits or on a case by case basis short tech stocks and reinvest in consumer staples, utilities, energy and infrastructure assets and those with justifiable earnings, tangible business models or income generating stocks.

 

This article is the expressed opinion of the author. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions. They constitute our judgement and are subject to change without notice. The views above may not be suitable for all investors and more complete information is available on risks, liquidity and matters of interest for qualified investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Past Performance is not a guarantee of future results. this information is for illustrative purposes only.