Last week two of Northlake's stock holdings in the technology sector
reported earnings. The verdict was mixed with QUALCOMM (QCOM) reporting
another outstanding quarter and issuing guidance for 2013 above Wall
Street expectations. EMC Corporation (EMC) reported earnings in line
with recently lowered Wall Street estimates but issued slightly
As would be expected, QCOM shares responded well to the company's
earnings and guidance, rising more than 5%. Interestingly, after an
initial sell-off, EMC shares firmed up. In fact, backing out a 20% drop
in the shares of EMC's 80%-owned subsidiary VMWare (VMW), the implied
valuation of EMC's 100%-owned storage businesses ended the week higher.
Of course, a significant part of EMC's valuation is VMW but it could be
a positive sign for future performance of EMC stock that the shares
held firmly on generally disappointing news. This is often a sign that
expectations have been lowered to a beatable level and that sellers of
the stock are done. In other words, EMC shares may be in strong hands
with better news to come and expectations low.
[Related -EMC Corporation (EMC): Margin Improvement On The Cards As Portfolio Expands]
I do not want to get bogged down in recapping the numbers from QCOM
and EMC, so let's focus on the big picture. Northlake's long-term
approach to individual stocks emphasizes big picture themes, similar to
thematic approach used by Northlake's Market Cap and Style models.
QCOM's results show the company's leading position as the most
important semiconductor supplier to smartphone industry. There was
worry that Apple's recent market share losses and cautious guidance for
the March quarter would negatively impact QCOM. Apple could be as much
as 15-20% of QCOM's business. However, the beauty of QCOM is that it is
a critical supplier to all of the major smartphone companies, including
Samsung, the current market share leader. QCOM is also expanding its
addressable market with products for all mobile devices including
tablets and possibly laptops and ultrabooks in the near future. The
investment thesis for QCOM is simple: riding the wave of smartphone
adoption and mobile internet all over the world. High end, low end,
emerging markets, industrialized markets. For QCOM, its does not
matter. Think Intel back in the halcyon days of the PC adoption cycle.
I think the stock can reach $80 this year, up more than 20% from
[Related -EMC Corporation (EMC): Are You Ready For The Next Internet Boom?]
EMC is a little trickier. Frankly, the stock has been disappointing,
trading at about the same level as when it was initially purchased for
Northlake clients in the fall of 2011. EMC has a similarly strong
secular growth story to QCOM as it provides products to manage the
massively growing storage needs driven by the internet revolution.
Cloud computing, big data, virtualization…EMC is the leader in many next
generation trends. The problem for the stock has been that the bulk of
the company's revenues come from large enterprises and governments.
These purchasers have been under a lot of pressure to control budgets in
a slow growth economic environment amid large Federal and State budget
EMC management has done a good job and the company has been growing.
Growth has lagged Wall Street estimates, however, placing a stiff
headwind on the shares. I am encouraged by the action in the shares
since the company reported. It is consistent with a bottoming pattern
often seen in stocks. EMC's valuation is cheap and it is not a stretch
at all to see the stock return to the $30 level in 2013. I am keeping
EMC on a short leash but my current position is to hold on for one more
quarter expecting that guidance will have proven conservative and
expectations are low setting up a positive surprise and renewed
enthusiasm for the shares.QCOM and EMC are widely held by clients of Northlake Capital
Management, including in Steve Birenberg's personal accounts. Steve
Birenberg is sole proprietor of Northlake Capital Management, LLC, a
registered investment advisor. Regulatory filings can be found at
www.sec.gov. QCOM is a net long position in the Entermedia Funds.
Entermedia runs long/short equity hedge funds focused on media,
entertainment, communications, leisure and related technologies. Steve
is portfolio manager of Entermedia, owns a controlling stake in
Entermedia's investment management company, and has personal monies
invested in the Funds.