Asphyxiation is a condition in which the body doesn’t receive enough oxygen. A common side effect of asphyxiation is death. Before then, of course, there are hallucinations; we start seeing things that don’t exist. When the market is making new highs, valuations are high, and you get altitude sickness. It is typical to suffer from value asphyxiation: imagining value when it is not there. Mistakes in this environment predominantly come from the commission (not the omission) of buy decisions. That is why, before you commit your capital, you have to double-check your lucidity and think thrice. And that is why, when we stumbled on Qualcomm , we could not believe what we saw.
The San Diego–based chipmaker should double its earnings over the next four years. It has an impenetrable moat, great management, a cash-laden balance sheet, infinite incremental return on capital — and it is cheap, trading at a low-teens multiple. These things are not supposed to happen to a company with a market cap of more than $100 billion that is followed by several dozen analysts — unless the Street is concerned that the company is on its way to becoming obsolete — and especially not while the market is making new highs.
Qualcomm is a value in plain sight because it is misunderstood by investors , and for good reason: Two thirds of its revenue comes from the semiconductor segment. The company designs chips that go into cell phones and tablets. If you read sell-side reports on Qualcomm, most of the ink is spilled about its semiconductor business. This bias makes sense, because Qualcomm is covered mostly by semiconductor analysts, and that is what they know — semiconductors. They have an edge in that arena, and so that is what they write about. They can provide many insights about the intricacies of Qualcomm’s chip-set designs and how its chips are in hundreds of smartphone models, whereas Intel (its largest potential rival) has its chips in less than a handful. They will tell you how Qualcomm combines multiple functions into a single chip, and how that gives the company a competitive advantage. Analysts will generate dozens of pages on the semiconductor segment, which has been growing 20 percent to 30 percent a year.
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email, click here or read his articles here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process (see PDF presentation here), as detailed in Vitaliy Katsenelson’s Active Value Investing (Wiley, 2007) book.