Bob McWhirter, president and portfolio manager of Selective Asset Management Inc., took your questions on the outlook for the tech sector, and which stocks may be best poised to outperform, in a live one-hour discussion on Thursday, March 17.
Mr. McWhirter has more than 30 years in the securities industry and is a top-ranked money manager in Canada. He manages Selective Asset Long-Biased Equity Hedge Fund using a 12-factor stock selection methodology that has both growth and value characteristics. Prior to establishing SAMI, Mr. McWhirter was vice-president and portfolio manager at First Asset Investment Management Inc. and RBC Global Investment Management Inc., where he worked for more than 20 years. During this period, Mr. McWhirter managed approximately $2.25-billion in the Canadian High-Technology sector of the Royal Bank's Canadian Equity Mutual Funds.
The following is a transcript of the discussion:
11:58 Darcy Keith - Good day everyone, and welcome to this live discussion on the technology sector with Bob McWhirter, president and portfolio manager of Selective Asset Management Inc. I'm Darcy Keith, a web editor for Globe Investor and Report on Business. Good morning Bob.
11:59 [Comment From Bob McWhirter]/b>
Good morning Darcy.
12:01 Darcy Keith - Bob, just to start off this discussion, what are your feelings on the sell-off we've seen over the past few sessions? The technology sector has been hit pretty hard, just like the broader market. Is the sector particularly vulnerable to the Japan situation, given the numerous suppliers there?
12:04 [Comment From Bob McWhirter]/b>
Darcy, the recent pullback has been in stock markets around the world as they have declined below their 50 day moving averages. I believe this is a correction in the ongoing bull market. Japan is a significant supplier of components in handsets, smartphones and is 20% worldwide semi-conductor capacity and 50% semi-grade wafers. Most companies have second source suppliers to be able to makeup some of the expected supply shortfall.
12:05 [Comment From Bob McWhirter]/b>
We understand that 20% of Gennum's customers are in Japan, and about the same percentage for NeoMaterials.
12:06 [Comment From Pierre-Yves Charest ]/b>
I have been following Intel for 10 years or more. It is the first time that i see it trading below 10 times the earnings. What is you opinion on this company
12:08 [Comment From Bob McWhirter]/b>
Thanks for your question, Pierre-Yves. Intel's low P/E reflects virtually 0 earnings growth forecast by Analysts for 2011, $2.06 vs $2.05 last year. 2011's earnings growth is forecast to be a modest 8%. I think there are better opportunities in other tech stocks.
12:08 [Comment From Steve ]/b>
I have read many analyst opinions on how undervalued Cisco is. What is your opinion on Cisco both short term and longer term.
12:11 [Comment From Bob McWhirter]/b>
Steve: John Chambers of Cisco was asked about 7 years ago what keeps him up at night...His response was HUAWEI. A name that few people knew at the time. HUAWEI's business model is based on 15% profit margins, whereas Cisco's are based on 60% and Cisco's getting beat up by many competitors (like Intel, 10.3x P/E reflects 3% earnings growth forecast by Analysts for 2011. $1.65 vs. $1.61). Cisco generates significant free-cash flow at 10.6%, but little growth is expected. Longterm the company may come back as they focus on higher margin software solutions.
12:13 [Comment From Neil ]/b>
Bob..The Nasdaq and S&P both have had a small correction..I am overweight in the Canadian market with no exposure to Europe/Asia and a 10% in US comprised of S&P, NAsdaq and Russel 2000. Any suggestion?..I am looking a long term horizon of 10 years.. Thanks and wait for your reply
12:16 [Comment From Bob McWhirter]
Thanks, Neil: I believe your overweight in Canada makes sense, since the Canadian market has a significant weighting in energy and base-metal stocks which benefit from the above-average growth of developing countries. So you have an indirect investment in Asia. Canada's better economic outlook, lower budget deficits also will continue to support a strong Canadian dollar - another consideration when investing outside Canada. The advantage of the U.S. is diversification in industries like technology that aren't significantly represented in the Canadian market.
12:18 Darcy Keith - Bob, what are some of your best ideas for investments in the tech sector right now? Any companies especially looking undervalued?
12:22 [Comment From Bob McWhirter]/b>
Darcy, an undervalued stock would be: RIM. I say RIM because the company has 10% 4 quarters free-trailing cash flow and pushed up $3.2Billion in the last 4 quarters. With 46% forecast ROE and a P/E of 8.2x for 17% earnings growth $7.21 vs. $6.17 it appears attractive. However, the sales of the Playbook Tablet and sales success of the new handsets expected this year are key to provide growth in calendar 2012 as current earnings growth for the Feb 2013 fiscal year is flat.
12:24 Darcy Keith - Interesting to hear about the home grown favourite. Our next question comes from Raju
12:24 [Comment From Raju ]/b>
Will Fiber Optics stocks come back into play with the insatiable demand for bandwidth from Youtube to Netflix ect. Just wondering why the money given by the government for infrastructure was not used in the building of highway bandwidth!
12:25 [Comment From Bob McWhirter]/b>
I also think Celestica appears attractive. As it has a 8% 4 quarters of frtrailing free cash-flow, a 16% forecast ROE and a P/E of 10x against 26% earnings growth for calendar 2011..and 10% earnings growth is forecast for 2012. Cash is estimated at $575Million approximately 28% of market capitalization.
12:27 [Comment From Bob McWhirter]/b>
Raju: Fibreoptic stocks have come back, notably JDS Uniphase. In Canada, EXFO and Zarlink are benefitting from products used in the optical space. EXFO in test and measurement as well as new products in monitoring network performance at the core and at the edge of the network. Zarlink's timing chips are used in the core of the network to reduce jitter, which becomes more important as optical speeds continue to advance 10gig to 40gig and beyond.
12:28 [Comment From sal ]/b>
Hello, Can you please comment on Zarlink semiconductor? Thank you very much.
12:30 [Comment From Bob McWhirter]/b>
Sal: As noted above, Zarlink's new products are experiencing strong growth and the legacy business will have burned off by summer of this year. Zarlink has a 15% 4 quarter trailing free cash-flow yield, cash is estimated at $123Million or 50% of market cap. We own shares in Zarlink and expect that the new medical products will start to show significant sales growth from mid-summer 2011 and beyond.
12:31 Darcy Keith - And, not so surprising perhaps - we have a couple follow-up questions on RIM: Here they both are:
12:31 [Comment From Eager Crooks ]/b>
Why is RIM so cheap compared to Apple? They have almost the same 5 years earnings growth.
12:31 [Comment From jmweb ]/b>
Bob, do you feel the Playbook will be a success for RIM?
[Comment From Bob McWhirter]/b>
Zarlinked continued: Zarlink's P/E is 10.6x, March 2012's 0.19cent earnings estimate forecast growth of 17% and 2012's P/E of 8.6x appears attractive against 22% earnings growth and Zarlink's ROE is forecast to be 19% is fiscal 2012.
12:34 [Comment From Bob McWhirter]/b>
Eager Crooks: Rim is cheap compared to Apple because Apple has had huge success in their ecosystem which ties together their computers, music, phones, tablets and they have huge cash flow from their Apps. But, RIM's opportunity is in the playbook tablet, which offers SECURE communications for corporations and individuals (and politicians!).
12:35 Darcy Keith - It sounds like you are optimistic on Playbook's prospects. Are you confident it will be a smashing success?
12:35 [Comment From Bob McWhirter]/b>
Jmweb: Yes. I believe the Playbook Tablet will be a strong success for RIM. I recently met with SoftChoice, who will be one of 7 re-sellers of the Playbook. SoftChoice said there is strong corporate interest in the product, and RIM has new software which will allow dramatic reduction in the cost of long-distance calling costs for companies.
12:36 Darcy Keith - Sounds promising for RIM. Here's a question on a key rival
12:36 [Comment From Raju ]/b>
Bob, what kind of growth do you see with Apple? With Market Cap of $312B and PE of 18.88. At this market cap can the shares grow more then 10% per year. Are we in for a major correction is Apple.
12:36 [Comment From Bob McWhirter]/b>
Darcy: I'm meeting with Jim Balsille (co CEO of RIM) on March 30th courtesy of Paradigm Capital and expect to hear more details on the Playbook.
12:38 [Comment From Bob McWhirter]/b>
Raju: Apple is forecast to have 53% earnings growth for calendar 2011, $23.20 vs. $15.15. Growth is expected to moderate to 12% in 2012, however that is a 1.03x P/E to growth for 2012 which doesn't appear to be overly expensive. However, investors may be disappointed in 12% growth from Apple. Their 6.2% 4 quarter trailing free-cash flow yield pushes up a lot of cash.
12:39 [Comment From Nick ]/b>
Hi Bob, can you comment on HP? Is it a good time to buy? Thank you.
12:43 [Comment From Bob McWhirter]/b>
Hi Nick: Similarly to Apple, HP is forecast to have significant growth (55%) in 2011. $3.98 vs. $2.57 with growth slowing to 10% in 2012 against a 13.9 P/E it's a 1.5x P/E to growth and appears relatively expensive. Their 4 quarter trailing free cash-flow of 9.6% is attractive. But slowing growth and a high peg is of concern. From a technical perspective HP has declined from $49.39 to roughly $40 and the monthly momentum continues lower and the stock recently made a relative strength low versus the NASDAQ. I'd give it a pass at this time.
12:44 [Comment From Guest ]/b>
Bob, what do you think of the Chinese Internet sector? Specifically, companies like SINA have been generating a lot of headlines for their Weibo product which could overtake Twitter in users before the end of the year (given the population of China).
12:48 [Comment From Bob McWhirter]/b>
We have had an investment in the Chinese search company BAIDU, over the last year. They have benefitted from Google's withdrawal from China. SINA Corp ranks well in our model, but the 40% P/E for 2012 against 30% earnings growth $2.27 vs. $1.74 gives me concern as well as the 52 P/E for calendar 2011 against 9% earnings growth forecast $1.74 vs. $1.59. Overall internet use continues to grow dramatically in China to the benefit of the Chinese internet sector. But stock prices do not appear inexpensive at this time.
12:49 Darcy Keith - Great insight Bob, thanks. Here's Raju with another question:
12:49 [Comment From Raju ]/b>
Darcy, What does Bob think of the valuation of Facebook and Groupon. Facebook in a span of two years went from a valuation of $7b, to $20B to $50B Groupon was offered $6B by Google but turned down and its' valuation was $15B and now Bloomberg has raised it to $25B. Are these numbers for real. Waiting eagerly for your response!
12:51 [Comment From Bob McWhirter]/b>
Raju: Putting a proper valuation on Facebook and Groupon is a challenge as Facebook has chosen to raise capital with minimal sales and earnings disclosure required as a private company. Both companies offer great products and Facebook looks to lever it's client base by offering other products like Groupon and e-mail.
[Comment From Doug ]/b>
Can you give an outlook on Bridgewater Systems? Thanks.
12:55 [Comment From Bob McWhirter]/b>
Doug: Bridgewater benefits from the explosion in volume generated by handsets, whether it's voice, video or data. Their products help bring order to chaos for telephone carriers and allow marketing of different priced products based on quality of service. The earnings are forecast to decline 19% from 60cents to 49cents in calendar 2011, giving a P/E of 16x. However earnings are forecast to grow 31% from 49cents to 64cents in 2012 giving a 12.3x P/E. The company has a 10.9% 4 quarter trailing free cash-flow and cash is understood to be $68mil or 34% of the market cap. I think the company will success in securing significant new business in the coming 12 months.
12:56 [Comment From george ]/b>
What's Bob's best high risk / high reward pick theses days ?
1:00 [Comment From Bob McWhirter]/b>
George: Sounds like you're looking for the classic "go up or blow up" stock...BXI (BioExx Specialty Protein) is forecast to lose 6 cents this year and earn 3 cents giving a 60x P/E in calendar 2012. Investors are waiting for signs that the company can achieve commercial volumes of protein from canola by the end of this year. If they are successful the stock should advance significantly as the company will then proceed with construction of the second plant in North Dakota at 2x the volume vs. the Saskatoon plant.
1:01 [Comment From george ]
Thank's Bob, have been in BXI since .37, I see the potential as well.
1:01 [Comment From Raju ]
Merci Beaucoup, Darcy and Bob. That was excellent!
1:02 Darcy Keith - And thank you for the questions Raju - and everyone else! I'm afraid we can't get to all the questions - we've had a ton. Bob, any final thoughts you'd like to leave with our audience?
1:03 [Comment From Bob McWhirter]
Darcy thanks for the opportunity! We're optimistic about the outlook for the market in the 2nd half of the year, and as Ned Davis research recently noted, once the post-panic in Japan recedes, we expect the global bull-market to resume. Thanks for your questions!
1:04 Darcy Keith - Great, thank you so much for joining us today Bob, that was really good insight. Our next topic for Investor All Stars is the hot agriculture sector, and we'll be hosting a live discussion on that soon. Thanks to all! And Good bye for now.