My primary strategy is to create a list of companies that I have at least some personal knowledge of. Which mainly for me would be companies I either personally use, do business with in some form, or at least are in industries I have personal knowledge of.
Recently, I’ve made purchases of Cisco (CSCO), which I believe fits my strategy, not as strongly as I would like, but enough to be considered.
I then determine what I believe the value of the business based on a variety of factors. Then I wait for the price of business to drop below this value I’ve determined. Once reaching a target price below the business value that reflects the risk or uncertainty of my value of the business I buy if my assumptions have not changed.
Because my target prices are usually quite low to the current market price, most of the time my purchases are made upon a severe pullback in the market or some overreaction to current news for a particular stock, which is the case with CSCO. The price has continued to drop since I bought my original purchase and additional blocks. I am reluctant to add more, as with any purchase, I must allow that my assumptions could be wrong about a business, which is why I try to diversify enough to allow for some error. In the case of Cisco, at the current price, I would definitely be adding some more if wasn’t already such a large percentage of my portfolio. It’s a great price to initiate a position if you don’t already have one.
I guess what’s important is to have a strategy that you do really believe in and one that doesn’t cause you to be alarmed when your picks drop a lot. When I first started investing in the 90s, that was the problem I had. I liked a stock I bought when I bought it, but when it went down, I would get scared because as it turned out I didn’t really believe in the methodologies I was using. The difference now, is I’m not scared with the fluctuations of stock prices… only with actual business decisions that I disagree with over time.
At this time, I believe that there are some nice possibilities right now in big tech… Hewlett Packard (HPQ), Intel (INTC), AMD (AMD), Microsoft (MSFT), and SanDisk (SNDK) are some potentials that I may consider initiating positions or adding to existing positions. Big tech in general seems to be really out of favor right now due to temporary reduction in tech spending, which will rebound at some point, it’s just a matter of time. If you believe in the continual progress of technology, the internet, cloud computing, high speed internet, more services being offered online, you have to be bull on big tech in the long run.
For example, I’ve held off from making extra tech purchases for some time now, due to economic uncertainties, but I will have no choice but to upgrade my computing equipment as it’s either wearing out or going obsolete and I imagine there are many other individuals/firms in a similar situation.
I believe the market is really overreacting on this one and taking a very short term view, creating some good opportunities for the long run.
Yesterday, I decided that it was time to begin rebuilding my Goldman Sachs (GS) position.
Last year, I had sold my position when the financial stocks began taking a hit due the subprime mortgage crisis.
I feel that much of the problems are now priced into the financials and now may be a good time to begin getting back in. I would suggest starting with a small position in the best run, strongest financials.
Goldman Sachs is one of the leading firms that has weathered the past year’s problems very well. I feel quite confident in their abilities in the long term and based on my analysis the stock appears to be a very good value at the current price. I figure the company to be worth about $237/share.
Next, I initiated my position in HP (HPQ). This is a company that I’ve wanted to own for some time now.
Over the years I’ve been in business much of my technology purchases have been HP products. I have purchased (2) HP Desktops, (3) Compaq Laptops, (3) HP Printers, and a HP Business Calculator. The products have generally performed quite well for me over the years and the service has been great.
When I damaged my laptops in the past, the support would be so fast to get it repaired. I would make a phone call, DHL would be at my door the next day to pick it up in a special laptop box. Then, within 2-3 days later, the laptop would appear again at my door all fixed and most of the time the repairs were covered under the extended warranty I purchased, which was usually a great deal. I valued this service very much and it’s why I continued to be loyal.
I’ve also always thought that their products have been the best value in terms of features for price. Whenever I’m looking for a new computer or printer, I usually review all the different brands and I end up choosing the HP product as their product usually provides me the features I need at the lowest cost.
Now is a good time to get in. The stock has pulled back some with the general market problems. The company is strong and getting stronger as it continues to gain market share in the US and abroad. They are becoming a complete one-stop shop for all your IT needs, especially with their merger with EDS. The new management has been great cost reduction and should be able to do same with EDS. HP also should trend higher in the short term as it should see a spike in back to school sales.
The current price is slightly overvalued based purely on intrinsic value, but slightly undervalued compared to competitors such as Dell (DELL), so I’m starting with a small position and I’m prepared to buy more if the price dips further. However, the premium may be warranted if it can continue to increase growth in income at better than expected rates.
Full Disclosure: I own shares of Goldman Sachs and HP.