This “Double Your Money” Stock Pick Will Shock You

18 | By Michael A. Robinson

As someone who’s been around Silicon Valley for decades, one hard lesson that I’ve learned is this: Fallen high-tech leaders almost never make it back.

But on the rare occasion that one of these former high-tech heavyweights do rebound, the profits can be staggering.

Today I’m going to show you what to look for so you, too, can find these rare-as-hens-teeth turnarounds.

And that’s not all.

I’m also going to tell you the tale of a legendary turnaround that did work. Then I’ll talk about two rebounds that are already underway – but that still offer some nice moneymaking potential.

Finally I will round out today’s visit by showing you a tech-titan turnaround just getting started.

And it’s one of the best rebound profit plays that I’ve ever seen.

It’s so good, in fact, that I can’t believe Wall Street isn’t already all over it – because it’s almost the perfect turnaround candidate. This company:

  • Is a market-share leader, meaning it dominates its existing business.
  • Has targeted a scorching new market that it’s moving into to re-ignite revenue growth.
  • Has already underscored its rebound resolve by installing a new CEO to lead its makeover.
  • And actually pays a dividend – and, in fact, will compensate you with a hefty 3.8% income stream as you hold the stock in anticipation of the potential double-your-money payoff.

You’ll be stunned when I tell you which company I’m talking about.

The bottom line: This is a double-your-money profit opportunity. And it’s hidden in plain sight.

From Leaders to Laggards to Leaders Again

Out here in Silicon Valley, the term “disruptive technology” is getting used with increasing frequency.

And the “body count” is rising.

Disruptive technology describes a situation where innovation allows a whole new group of companies to “leapfrog” existing leaders – creating new markets and pushing old ones to the sidelines.

One great example is the whole mobile-device market, which has turned the desktop PC into a high-tech dinosaur. Smartphones and tablets are experiencing scorching growth – outselling PCs by a 5-to-1 margin.

That’s created a whole new set of tech-sector heavyweights, and has transformed such PC sector-linked firms as Dell Inc. (Nasdaq: DELL) from leaders to laggards.

Even so, some of these firms that get tossed onto the technology scrapheap are able to find the magic elixir that allows them to rediscover growth – and make the full-circle transformation from leaders to laggards to leaders again.

Before unveiling my profit play, in fact, I have three such examples to show you.

And they all have one thing in common.

Each of these leaders-to-laggards-to-leaders again installed a new CEO to lead them.

Let’s begin with perhaps the biggest and most successful tech turnarounds of all time – the revamping of International Business Machines Corp. (NYSE: IBM), which was led by Louis V. Gerstner Jr.

Teaching the Rumba to an Arthritic Elephant

Gerstner made his bones at McKinsey & Co., American Express and RJR Nabisco – distinguishing himself at every stop along the way.

But as a tech-sector outsider, it was still a stunner when he was recruited to fix “Big Blue” – which was in such bad shape that wisecracking pundits had re-christened it as “Big Black and Blue.”

When he joined IBM, most insiders believed that the company’s mainframe-computer business – known in the industry as “big iron” – was unfixable. So there was already a plan in place to “disaggregate” the company … you know, break it up into smaller, entrepreneurial ventures known as the “Baby Blues.”

Gerstner put an immediate stop to that plan, correctly realizing that the market opportunity for IBM was as a broad-based technology integrator. And if you read his memoir, “Who Says Elephants Can’t Dance,” you can see that Gerstner never veered from that vision.

Under Gerstner’s stewardship, IBM went from failing firm to a resurgent tech titan – with a $217 billion market cap and a $195 stock price.

Gerstner retired a decade ago. But from the time he took over in April 1993, IBM’s stock has risen nearly 1,390%.

And that’s before you factor in dividends.

As our IBM story shows, there’s a boatload of money to be made from a firm that goes from leader to laggard to leader once again …

Indeed, Gerstner would probably tell you himself: His 2002 net worth was estimated at $630 million.

And there are three other storied Silicon Valley firms that are poised to become “the next IBM.”

Each of the three companies has installed a savvy new CEO.

And each of the three has put in place a bold turnaround strategy.

Each of these firms is on track to create significant value for shareholders – with stock prices that could double or more over the next few years.

But there’s one that we really like – even though its makeover is the least developed of the three.

Before we get to that, however, let’s take a look at the first two.

And we’ll start with the fabled Hewlett-Packard Co. (NYSE: HPQ).

H-P’s Billionaire CEO

Meg Whitman has a lot to prove.

It was Whitman who transformed eBay from a venture with 30 staffers and a black-and-white Web page into an e-commerce heavyweight with $8 billion in revenue. It was also Whitman who, in 2008, was identified by The New York Times as one of the mostly likely candidates to become the first female president of the United States.

But when Whitman took over H-P in 2011, she did so after suffering a huge loss the year before. In 2010, she spent millions of her own money in a bid to become California’s governor – and lost.

Now, she’s rebuilding her own career as she transforms one of Silicon Valley’s oldest players into a focused, disciplined – newly growing – venture.

Prior to Whitman, the company had gone through four CEOs in 13 years. Even worse, it had written off more than $8 billion for disastrous mergers – the same as if it had taken shareholder money and flushed it down the commode.

H-P is a troubled company. But Whitman’s performance at eBay and other career stops underscores that the self-made billionaire has the chops to pull off this corporate makeover.

And she’s already made lots of progress.

Last January, H-P sold $530 million worth of computer servers to the Bing search unit of Microsoft. That was the first time in several quarters that H-P snatched server sales from rival Dell.

Little wonder H-P’s credibility gains are being accompanied by expansions in market share.

Just three weeks ago, in fact, market researcher IDC said H-P was tied with IBM for first place in sales of high-performance computers needed in the growth field of Big Data. Both firms have a 31.5% market share.

At the same time, Whitman is working to persuade key clients that H-P won’t abandon the PC sector – a necessary about-face from a ruinous strategy announced by her predecessor. And she’s working to improve margins as the firm develops consistent new products for the fast-growing tablet sector.

Whitman often tells Wall Street this is a five-year turnaround. But investors clearly already like what they see.

H-P’s shares are up roughly 70% this year. In its most recent quarter, the company’s profits fell 11% on a year-over-year basis. But earnings were so much better than analysts had feared that the stock has risen 14% since that May 22 announcement.

Whitman still has a lot of work to do. And that means the stock still has lots of room to run. H-P shares currently trade at a paltry 6.5 times forward earnings. If she can get some valuation expansion – and just get the Price/Earnings (P/E) ratio up to 12 (still a 20% discount from the overall market) – the share price could double to $48.

New Yahoo! Exec Making Bold Moves

Marissa Mayer can describe her biggest challenge in one word – growth.
When Mayer became CEO of struggling Web firm Yahoo! Inc. (Nasdaq: YHOO) roughly a year ago, she was taking control of a company with badly flagging sales.

A former executive at Google, Mayer aims to fix that as fast as possible.

Indeed, she explained that her recent $1.1 billion acquisition of micro-blogging site Tumblr was a way to generate more traffic for Yahoo! The idea is to ramp up “page views” as a way to sell more online ads.

Because the Tumblr right now brings in just $13 million in ad sales, the mega-price-tag purchase raised eyebrows (and even some hackles) on Wall Street. But it increased Yahoo’s user base by 50% to 1 billion. More to the point: Before the merger, Tumblr had just 25 sales agents; but Mayer has some 2,500 who can monetize the opportunities that the new venture offers.

And Mayer isn’t done – she’s looking to add video streaming to the lineup. The firm has bid between $600 million and $800 million for Hulu, which delivers online TV shows and movies from 480 content providers.

Even modest sales growth could transform the company’s financial position – and ignite its share price.

Last quarter, Mayer got 36% earnings growth on a 6% decrease in sales. Yahoo! boasts an 82% profit margin – so close your eyes and paint a mental picture of what Mayer could do if she can engineer a revenue increase.

The company right now has a market cap of about $28 billion. But Mayer is inspiring confidence among shareholders, who believe she’ll find ways to ignite sales and profits.

Yahoo! has seen its stock price zoom more than 60% in Mayer’s first year in office. But there’s still plenty of upside. With a P/E of just 7.5, Yahoo! Shares are trading at half the market multiple. So just by getting the shares to trade at the market multiple would be enough to double Yahoo!’s share price.

And one way to get that kind of multiple expansion is to boost investor confidence.

From what I’ve seen so far, I can say that Mayer isn’t an exec that I’d want to bet against.

And, speaking of bets, let me close out this report with the leaders-to-laggard play that I believe is the best of the three that I’ve detailed for you today.

You see, I’m betting you’ll be stunned that the company I’m talking about here is struggling chip giant Intel Corp. (Nasdaq: INTC).

Rule No. 5 in my five strategies for generating high-tech wealth tells us to target stocks that have the chance to double in price.

And this particular double-your-money profit play is hidden in plain sight …

Here’s why.

It’s “Intel Inside” All Over Again

IBM, H-P and Yahoo! all went “outside” to find their new leaders.

But like its famed (and highly effective) 1990s branding strategy, it was “Intel Inside” for the PC-chip heavyweight.

And despite being an insider, new CEO Brian Krzanich knows how to make a big entrance.

After logging 30 years at Intel, the 52-year-old insider recently assumed the helm at a company that’s been drifting for a decade. Intel continues to dominate the PC-chip market. But that’s not where the growth is.

So Krzanich knows he needs to address the company’s biggest shortfall – its inability to make its mark in the mobile-chip market.

He’s already making moves.

In late May – after less than two weeks into the job, Krzanich bought the ST-Ericsson unit that makes microchips for wireless GPS communication.

That month he also forged a key alliance with Apple Inc. (Nasdaq: AAPL) arch-rival Samsung Electronics Co. Ltd. (KRX: 005930), which makes the highest-selling U.S. smartphone and is coming on strong in tablets.

Intel will have its power-efficient Atom line of processor chips inside Samsung’s new Galaxy Tab 3.

This is a big win.

As we’ve been telling you for months, the “Mobile Wave” is massive, and is where growth is at in the chip sector.

But, as we speak, mobile accounts for a pitiful 1% of Intel’s sales.

The Galaxy alone could boost that several times over. And Krzanich is trying to get traction elsewhere by selling more processors for wireless data centers. Intel has also just unveiled a new line of high-speed 3D chips.

Intel is currently trading at just under $24 a share.

But here’s why I like this turnaround play so much.

Intel is projected to earn about $2.05 a share in 2013. But these moves could boost earnings by a good 60% over the next several years. If Krzanich’s strategies can nudge Intel’s P/E from the current 12 to about 15 as he meets earnings projections of roughly $3.25 a share – neither of which is much of a stretch – this is a stock that could easily double to more than $49 a share.

And with a dividend yield of 3.8% – a nice payout in a “zero-interest-rate” environment – you’ll be well-paid to sit and wait for Krzanich’s transformation to take shape.

So if you’re looking for net-wealth builders – investments with a reasonable risk profile and a serious upside – any of the transformation plays I’ve outlined today are worth a serious look.

And keep stopping back. In Strategic Tech Investor, we continue to bring you our best high-tech thinking, each week.

[Editor’s Note: Your feedback is very important. As always, I welcome your comments, questions and suggestions. Post a comment below … I look forward to hearing from you.]

18 Responses to This “Double Your Money” Stock Pick Will Shock You

  1. paul francis says:

    Your article was my first exposure to the KRX market. As I’ve been warned against pink sheet trading, the EWY etf ends up being my most accessible tool for eyeballing Samsung’s behavior. Will keep an eye on Intel as you suggest; Enjoyed your piece very much: informative, clear and accessible even to an amateur like me. Cordial best wishes.

  2. Donald Jefferson says:

    Thanks for the comments –already hold all three for the same reasons you suggest. Also hold MSFT —in spite the Windows 8 week launch I’m not ready to give up.

  3. Richard Waldren says:

    As always Michael, thank you. Have been following your recommendations. I enjoy the teaching.

  4. Michael says:

    Thank You for this essay and reco: Intel. I will add it to my new IRA when it opens very soon.
    Thank You! for all the free recos and tech stosk education for those like me who cannot afford to pay high subscription fees.


  5. shelley says:

    “Mayer got 36% earnings growth on a 6% decrease in sales. Yahoo! boasts an 82% profit margin”

    The question worth pondering is how did the company post such high earnings growth when sales declined.

    • Michael Robinson says:

      Hi Shelley,

      Great question that cuts to the overhaul at Yahoo. If you really want the details, I urge you to go to Yahoo’s investor information page. There you will find lots of info about its first quarter results. You can listen to the webcast and read the financial press release. However, I’d recommend you look at the earnings slides for that quarter. They are in PDF format and you can see what’s happening with Yahoo’s financials.



  6. Roberta says:

    Very interesting report. Will place all three companies on watch list over the summer. Appreciate your clear style of writing. Keep up good work!

  7. Bob Baker says:

    I appreciate your articles. I feel you have solid information behing you. Personally, I am a being believer in IBM, INTEL, & EMC.

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