From an investing standpoint, I am old school. I like mature technology companies—think large established brands like Intel (INTC), IBM (IBM) and Oracle (ORCL). These companies can use healthy cash balances to unlock shareholder value, are more likely to fare well if the Fed starts raising rates as expected this year and stand to benefit from continued improvement in the U.S. economy.
Market Realist – Mature tech companies report robust earnings
The graph above compares the 4Q14 net earnings of Apple (AAPL), Microsoft (MSFT), IBM, Intel, Oracle, and the S&P 500 Index (SPY)(IVV). Apple was a star performer in 4Q14, with net income of ~$18 billion—its best ever. Apple was way ahead of Microsoft, which reported earnings of ~$5.9 billion. And Microsoft was followed by IBM, Intel, Oracle, and the S&P 500, which posted ~$5.5 billion, ~$3.76 billion, $252 million, and $4.1 million, respectively.
We used an equal weighted average method to calculate the average earnings of the constituents of the S&P 500. If we used the market-weighted method, we would have arrived at a much bigger figure than the 4.1 million above.
Mature tech companies have a lot of cash in their coffers. Net income doesn’t equal cash flow. Nevertheless, if the reporting is fair and unbiased, the two should be equal in the long run. These tech companies command a premium due to their strong fundamentals.
If the Fed hikes rates later this year, the cost of debt will rise. The top tech companies have more than enough cash to navigate through the rising rate period. The small caps (IWM) that are not so rich could face some problems, which means they could underperform relative to large-cap companies.
Read on to find out the leverage of the top tech companies.