Case Study On Teradata And Keysight Technologies by Ben Strubel, Strubel Investment Management

Dear InvThis month, we sold out of our position in Dolby Laboratories (DLB) with a very modest gain. In our last quarterly letter, I mentioned we were researching one company that was a former high flier, Teradata Corp (TDC).  Teradata is a leader in a popular technology buzzword: “big data.” (It develops software and hardware products to gather and analyze large volumes of data.) Teradata was a market darling from 2009 to mid-2012, climbing from $10 to almost $80 per share. A chart of the stock price is shown below.

Teradata And Keysight Technologies

After Teradata fell back down to earth, we decided to take a look. Unfortunately, rather than looking like a good investment, Teradata looks more like an excellent case study on what happens when a company possesses no economic moat and is under siege from competitors on all sides. Just about every large hardware and software company has launched big data initiatives.

As one of the first companies to bring to market big data analytics solutions, Teradata enjoyed strong profits and strong growth. As competitors entered the market, Teradata’s advantage began to erode. In fact, an astute investor could have easily avoided Teradata’s subsequent plunge in 2012 and 2013. The chart below shows the 10-year history of the Return on Assets (ROA) and Return on Invested Capital (ROIC) of Teradata.

Teradata And Keysight Technologies

(data from Morningstar.com)

As you can see, ROA and ROIC have steadily fallen throughout the last decade. Investors in Teradata would have had plenty of warning about the looming threat of competition if they paid close attention to the businesses returns on capital.

Until we see some evidence of a moat at Teradata, we won’t have any interest in the stock.

Keysight Technologies

Instead, we purchased Keysight Technologies (KEYS). Keysight is a recent spinoff from Agilent Technologies, which is itself a spinoff from Hewlett Packard, which is a spinoff from… No wait, we’re done. Hewlett Packard was the original company.

Keysight produces a variety of electronic testing and measurement devices that are used in the development, manufacture, and repair of electronic equipment. The company primarily serves the telecom and wireless network, defense and aerospace, and computer and semiconductor industries. Products range from devices to analyze wireless signals, products to test fiber-optic source lasers, to devices to measure the distance on circuit boards at the sub-nanometer level.

Unfortunately, during its time as part of HP and Agilent, Keysight generally was run as a cash cow business, with its profit used to support management’s other priorities, for example, the expansion of the life sciences business at Agilent. As a separate company with its management focused solely on one business unit, Keysight, we think, will be able to unlock untapped potential through higher growth and better capital allocation.

About Our Portfolios

The Capital Appreciation Fund and the Dividend Fund are innovative, investor friendly alternative to traditional actively managed mutual funds called a Spoke Fund ®. We can also customize portfolios for clients seeking less risk and volatility by including allocations to other asset classes such as bonds and real estate.

Spoke Funds are significantly less expensive and more transparent than a large majority of mutual funds. Both portfolios are managed for the long term using value investing principles. Fees for both portfolios are 1.25% of assets annually. That figure includes both our management fee and all trading costs. We try to minimize turnover and taxes as well in both funds.

Investor accounts are held in your name (we never take investor money) at FOLIOfn or Interactive Brokers*.

For more information visit our website.

*Some older accounts may be custodied at TradePMR.

Disclaimer

Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss.

The performance data presented prior to 2011:

  •  Represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, those investments are excluded from the composite results shown.
  • Performance is calculated using a holding period return formula.
  • Reflect the deduction of a management fee of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

Performance data presented for 2011 and after:

  • Represents the performance of the model portfolio that client accounts are linked too.
  • Reflect the deduction of management fees of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

The S&P 500, used for comparison purposes may have a significantly different volatility than the portfolios used for the presentation of SIM’s composite returns.

The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.