Playing the risk aversion card

I have deployed a good chunk of the idle cash balances (presently earning 2%) into slightly higher-yielding debentures which should mature within a 1-year time frame with little risk – the underlying companies have cash and/or liquidity to pay off the debt without too much difficulty and could withstand a 2008-style financial crisis. The transaction can also presumably be reversed without too much difficulty in case if I need to deploy the capital into a more efficient area.

Researching the public markets is like trying to find those proverbial needles in the haystack – each hour you pour into the haystack increases your chances of finding needles, but in no way are you ever guaranteed to finding them. Also, the way you sort through the hay might be more or less efficient than other haystack sorters, but your own output is proportional to the amount of time you put into the effort.

The markets also give you some hints on how many needles are in the haystack – right now everything appears to be “stable” and there are no world crises occurring of any significance, hence, the broader markets are likely to be closer to efficient pricing than when things were really rocking a couple years ago. I would suspect the number of needles (at least the ones made out of platinum) to be found are few. There are likely to be more silver needles and a lot of lead!

I have not had a lot of time over the past few weeks to efficiently sort through hay, hence, I have been a bit inactive and parking my portfolio into a very risk-averse position. The easiest way to lose capital is to force trades through without some sort of justification why you are getting sale prices on what you are buying. Companies like Hewlett Packard (NYSE: HPQ) appear to be on sale, but I typically shy away from companies with such huge capitalizations, but you never know what you might get.

Quick review of some large cap technology stocks

I am continuing to look at the US large cap sector, just for personal review rather than serious consideration. I am continued to be surprised by relatively good valuations, around the 10% yield levels. Most of these are in the first-generation “old-school” technology sector. Very well-known companies include the following, with some very anecdotal remarks on my behalf:

Microsoft (MSFT) – Trading at 9.3x FY2012 projected earnings, with $30B net cash on balance sheet, Windows/Office empire continued to be chipped away at with competition;
Intel (INTC) – Trading at 9.5x FY2012 projected earnings, $20B net cash on balance sheet, likely to be around for a long time, competition in mobile processors, but nothing in really ‘large scale’ CPUs except AMD;
Dell (DELL) – Trading at 8.6x FY2012 projected earnings, $8B net cash, well-known customer support/service issues, but otherwise entrenched in computer/IT market;
Hewlett-Packard (HPQ) – Trading at 7.3x FY2012 projected earnings, $10B net debt, along with Dell, entrenched in computer/IT market;
Lexmark (LMK) – Trading at 7.7x FY2012 projected earnings, $600M net cash, major supplier in printer/imaging market;
Xerox (XRX) – Trading at 8.3x FY2012 projected earnings, $8B net debt, in a similar domain as Lexmark;
Seagate (STX) – Trading at 7.2x FY2012 projected earnings, $0 net cash/debt, hard drive/storage manufacturer;
Western Digital (WDC) – Trading at 9.3x FY2012 projected earnings, $3B net cash, in a similar domain as Seagate;
Micron Technology (MU) – Trading at 8.4x FY2012 projected earnings, $600M net cash, memory manufacturer;

One would think that diversifying a position into these nine companies and calling it the “Old-school technology fund” would probably be considered a relatively safe alternative over the next 10 years, compared to the 3.4% you would achieve with a 10-year US treasury bond.

My gut instinct would suggest that these companies would still be around in 10 years, especially Intel, which has the biggest competitive advantage out of the nine listed above.

I am also assuming that smarter eyeballs than my own have looked at these companies, which is why I suspect there isn’t much extraordinary value here other than receiving a nominal 10% return on equity, which is pretty good for zero research.