Part 1: Making Sense of Tech Stocks (01/28/2013)

ID: You have been involved in technology since it first came into the public realm almost thirty years ago.  It must be have been fascinating to witness the birth of what many people, including yourself, argue is going to be the engine that drives economic growth for the next several decades.

LB: I started out in the 1980’s as a technician repairing computers, if you can believe that.  My job was to fix those very slow and large computers that everyone thought were so amazing back then.  At the time I didn’t give much thought to where it was all heading, but it seems so obvious looking back on it now.

ID: When did you first realize the extent to which personal computers were going to change the world?

LB: I spent 12 years with Bell Atlantic Services working on water cooled mainframes. I would jokingly argue with the PC technicians that if a disk drive fell on you it should kill you. Mainframe disk drives were larger than a human being, weighing over 1000 lbs, while PC disk drives could be carried in a single hand. I realized then that the x86 microprocessor was the future and began adjusting my career to participate in the coming changes. I read everything I could find on the people driving the new technologies back then, including biographies of Steve Jobs and Apple’s rise and fall.

ID: Did you actually meet Steve Jobs?

LB: No, and to tell you the truth I doubt I would have liked him very much.

ID: A lot of people say that. Why?

LB: It was either his way or the highway.  He was brilliant, but he could also be ruthless in dealing with people. People I worked closely with had met him and confirmed he was very difficult to work with.

ID: Ouch! But you do have to admit he was very successful and made a lot of people a lot of money.

LB: Absolutely.  However, his greatest success didn’t happen until he realized that in order to produce a market leading product he needed to consume other technologies and combine them with his own innovations.  Although Steve Jobs became famous for creating the Mac, in truth that was only the first decent machine with limited potential.  He extended many of the inventions made publicly available by Xerox, like the mouse, and combined it with his proprietary software. This was the same limiting factor for mainframes, so it was obvious at that time that Microsoft was going to dominate the OS market.  As long as his products could only operate on his systems the growth potential was going to be limited.

ID: Then what happened?

LB: After he returned to Apple [editor’s note: Steve Jobs was fired from Apple by its Board of Directors in 1985 and did not return until 1996] he realized that he needed to create something that was ubiquitous and could operate on a wide variety of platforms.  At that time there was enough organic growth in the PC market to sustain growth, but he knew it was only a matter of time until he needed to come up with something else.

ID: And that was the iPod?

LB: Yes it was, and that was actually the breakthrough product that is still propelling the market today. The iPod was in reality an early iteration of the iPhone, since it created the platform from which a wide range of functionalities – in the form of Applications, or “Apps” – could be performed on a handheld device.  Once the iPhone came out the world would never be the same. I learned early in my career at IBM that it was because of the large Apps development community that Bill Gates and the PC had beat out Jobs and Apple. Straight line scale of economies always tell us that all the companies added together always beat any single surging company going it alone.  This is what drives down the costs, sending sales ever higher. We saw this when the cheaper VHS defeated the technologically superior Betamax in video recorders.

ID: But wasn’t Research in Motion [NASDAQ: RIMM – editor’s note: RIMM is now BBRY] there first with the Blackberry?

LB: Absolutely! But the Blackberry had major flaws.  It had a small screen, and the Apps were limited and really difficult to use.  The iPhone, like the PC, was the first smartphone which had an enormous developer community that matured it faster and created more useful Apps. This created the explosive dominance of both platforms.

ID: Why didn’t RIMM do the same thing with the Blackberry?

LB: It’s hard to understand unless you live in this world, but they were there first and were completely proprietary. They didn’t see the value of having other companies developing Apps for them back then.  By the time they woke up, Apple was quickly steamrolling past them followed by Google. They forgot the first rule of marketing: always give the customers what they want.  I think of it as operating in an “innovation vacuum”, where the boundaries are determined by the finite limits of their internal resources.  Meanwhile, their competitors were combining technologies and leveraging their resources to create superior products.

ID: So does that mean RIMM will never catch up; isn’t the Blackberry 10 supposed to put them back in the game?

LB: The development community for RIMM is tiny compared to Apple and Google. It’s just too little, too late.  In my opinion it is only a matter time until RIMM begins selling off whatever remaining assets it has – mostly its brand and its patents.

ID: Lately the stock has been on the upswing, but are you saying you wouldn’t buy it?

LB: It may do okay for a while, but eventually it is going to become a loser.  If I owned RIMM stock I would take advantage of this strength and sell it now.

ID: Is it really as cut and dried as that; they’re either a winner or loser?

LB: I think so.  Ultimately the consumer will dictate who survives, and RIMM will not be able to give them everything they want.  RIMM no longer has the financial resources to compete with Microsoft, who is also trying to buy its way into the handheld market.  RIMM will stick around for a while, but in the long run they are history.

ID: Who else in the tech world might become a long term loser?

LB: Believe it or not, Microsoft [NASDAQ: MSFT].  However, they are sitting on so much cash that they can still buy their way back into the game, which they are trying to do now.  They realized too late that the PC market is slowly dying, and are scrambling to gain market share in the smartphone space.  They have a ton of cash, good engineers and great marketing, so ultimately they can buy their way into a third place slot and will do fine based on the revenue they are generating from PCs. For the next twelve to eighteen months they should be fine, and then we’ll evaluate how they are doing in entering the smartphone market versus the continuing falloff in PC sales.

ID: I have to admit that it’s difficult to imagine Microsoft as being a possible loser, but then again the tech landscape is littered with former “can’t miss” companies.

LB: I can’t tell you how many times I tried to convince various tech companies that they were not going to make it unless they started migrating towards a more robust solution by consuming in addition to producing.  I use the term “innogration” to describe it; they must both innovate by using their internal resources, and aggregate by acquiring complementary resources from other vendors in order to create a superior product.  Many times they just laughed in my face.

ID: So what does Microsoft have to do to get back in the game?

LB: First, they need to realize that the handheld market is growing so fast that they don’t have to be number one in it to survive; they just need to be in the top three or four to make a lot of money.  Second, they also need to realize that the SmartTV market is potentially even larger, and gain a foothold in it while it is still in its nascent stage.  If they want to they could end up dominating that market, along with Google.

ID: So would you buy Microsoft stock?

LB: I would, but I’d be careful.  Too many people don’t understand that the PC market is dying – headed for a niche market like graphic workstations have been for 15 years – and are willing to pay too much for Microsoft based on that segment of their business.  Last year was the first time that PC sales declined not just in the US but worldwide, and that’s not as a result of the global recession.  Also, more Android and Apple iOS devices were activated on Christmas Day 2012 than on any other day in history.  The fact of the matter is PC sales will continue to decline and at an accelerating rate, and a lot of people still don’t get that.

ID: But what about demand from China, India and other parts of the world that are experiencing what is expected to be a long term surge in consumer demand – won’t they want a lot of PCs?

LB: They want a lot of personal computing functionality, but that’s not the same thing as wanting PCs.  They’re going to go straight to the handheld products – pad, tablets, and phones – and largely bypass PCs altogether.  They won’t follow the same product evolution that occurred here in the U.S.  Don’t get me wrong, businesses will continue to buy PCs for a while, but even they will move away from them pretty soon.

ID: I love using my smartphone, but when I’m working on a document I much prefer the large screen and keyboard that a PC provides.  Won’t that keep PC sales alive for a long time?

LB: No, because of cloud computing.  In the future your monitor and keyboard will automatically wirelessly connect to your smartphone based on proximity. There won’t be an actual computer at your desk; just a smartphone which will provide the means to access data stored somewhere else. There are standards being developed for this right now.

ID: So if what you say is true, why will people continue to buy PCs at all?

LB: Right now PCs are much more mature and robust and they have a high comfort level with it.  But consumers have proven that they will adapt to superior technology very quickly, particularly when it is less expensive and more flexible, so it won’t be long before they start replacing aging PCs with their smartphones. 

ID:  Okay, so RIMM is a ‘sell’ and Microsoft is a ‘hold’.  What about Intel?

LB: I have mixed feelings about Intel [NASDAQ: INTC], partly because I know them so well.  They stuck with the PC market too long, and are only now making the transition to portable devices.  They were making so much money off of the PC ecosystem that they could never justify biting the bullet and moving away from it.  Now they realize their mistake, and are scrambling to gain a foothold in the handheld market.

ID: So what is it going to take for them to become a “winner”?

LB: They need to be able to mass produce an affordable microchip for smartphones.  Sounds easy, but it’s not.  The chips they produce for PCs run very hot, but of course a PC has a fan inside of it to cool it down.  There’s no room for a fan inside of a smartphone.

ID: Will they make it?

LB: Maybe.  They have a lot of cash, and have now committed significant resources to R&D so they might be able to pull it off.

ID: Would you buy the stock?

LB: Yes, I think their stock should do well at least in the intermediate term.  If they screw up then I’d sell it as they won’t get a second chance to catch up, but they are smart and they have a lot of money so they should be able to continue to innovate and, like Microsoft, pay a good dividend for the foreseeable future.

ID: Is being able to pay a dividend really that important for a tech company?  For a long time, most of them didn’t pay any dividend at all.

LB: That’s true, but that was prior to “The Great Recession” that stripped bare the shortcomings of their revenue models.  We now know that the so-called “New Economy” of the late 1990’s was really the result of excess leverage, so investors want to be paid dividends since they are no longer willing to wait until they sell the stock to realize any form of economic benefit for the use of their money.

ID: Speaking of PC companies, what about Hewlett-Packard [NYSE: HPQ]?  They’ve had a lot of bad news lately that has driven down the price of its stock, so would you recommend buying it cheap?

LB: Absolutely not!  They also got into the handheld game too late, and tried to buy their way back in by making some really poor acquisitions.  Meg Whitman is a very smart businessperson, but even she can’t save them at this point.  I’d sell it now while it still has some value.  It’s definitely a long term loser.

ID: Earlier you mentioned Apple [NASDAQ: AAPL] and Google [NASDAQ: GOOG]; aren’t they both clearly going to be long term winners?

LB: Yes, but their stocks are priced too high.  I wouldn’t buy either one of them now, but if they come down far enough in price I would definitely buy them.  For Google, somewhere around $600 seems fair to me.  As for Apple, I’d be willing to buy it at $400.

ID: Okay, so are there any long term winners that can be bought now at a fair price?

LB: Yes.  The big winner is Verizon [NYSE: VZ], which recognized where things were headed and made the transition earlier than everyone else.  They made a huge investment in Fios which is going to pay off for a long time.  They are swimming in cash, and doing a great job of continuing to expand their product line by acquiring complementary technologies.  Since they don’t have a “gee whiz” product that you can hold in your hand the public is not as aware of them as they are Apple, but they have just as much upside potential since they control the bandwidth.  In my opinion it is the single most attractive tech stock for the long term.

ID:  Those are some awfully strong words – what makes you so confident in your assessments?

LB: Look, it’s actually quite simple.  The long term winners all have three things in common: first, they have already recognized that the PC market is dying and are moving aggressively towards portable computing; second, they understand that in order to produce a market-leading product they have to be willing to acquire technology from other companies and integrate them into their own products to satisfy consumer demand; and third, they have enough cash to be able to do all of those things and still pay their investors a reasonable dividend.  When you look at it that way, it’s pretty easy to separate the winners from the losers.

ID:  Thank you for time, and we look forward to speaking with you again in a couple of months for you take on other aspects of the technology sector.

Part 2: Taking the Teeth out of FANGs (03/11/2013)

ID: Since we last spoke back in January a lot has happened with some of the tech stocks we discussed.  In particular, it appears Apple [NASDAQ: AAPL] stock is no longer invincible and is slowly dropping towards the $400 value that you expressed.  Why is that?

LB: Even at its current price Apple’s dividend is only a little over 2%.  Investors expect more than that, especially when the company has so much cash.  Recently its CEO said that he is considering making a one-time, special dividend back to shareholders, which I think is a bad idea.  All he needs to do is bump the regular dividend closer to 5% and everyone will want to own it again.  

ID: As Apple has declined, a lot of attention has been given to the so-called “FANG” stocks, which is an acronym that stands for Facebook, Amazon, Netflix and Google. Some analysts believe that to participate in the next upward swing in the tech sector you only need to own these four stocks.  How do you feel about that?

LB: Honestly, these are the companies we should be very wary about right now.  Even though they are all good tech companies they each have issues which can’t be overlooked for the near term.

ID:  Why is that?  Let’s take them one at a time.

LB: Okay, let’s go down the list.

Facebook [NASDAQ: FB] went public last year and lost almost half of its value in the first few weeks. Since then it has traded in a trough between $28 and $32. Lang himself said there was resistance at $32. So what makes anyone think that the resistance is going to be broken? What innovation are they producing to break through? They have an advertising revenue model similar to, but not as strong as, Google’s. I haven’t seen anything which will propel them through the $32 barrier.   

As for Amazon [NASDAQ: AMZN], Lang said wait for a pullback before buying it.  In other words, he is acknowledging that it is overpriced at current levels.  If I really felt the stock was going to move higher and stay higher then I would wait for a pullback before making that recommendation. Amazon is a great company but I feel it is trading at a premium in the current market.

Netflix’s [NASDAQ: NFLX] stock value tanked when they raised prices and just recently finished a large run-up in valuation. If I was a fan of Netflix I would have said buy it after it had tanked.  But I’m not a fan, as it is struggling to buy access to media content for their lineup which can be resold at a profit.  And there is yet a good chance that Netflix can lose the battle for electronic movie and TV show rentals as their mailing CD rentals continue to lose ground to Redbox.

Google [NASDAQ: GOOG] is a great company. But it is trading at its all-time high and even Lang admitted that they are overbought. If the market corrects as many are predicting we could see a significant retracement in Google stock just as we saw with Apple last month.  As I said last time, I like Google stock at $600, but at $800 it is simply overvalued for a company that pays no dividend.

So to summarize, the good ones are overbought and the bad ones shouldn’t be bought regardless of price, which completely undermines the idea of buying the FANG stocks as a proxy for the tech sector.

ID: In last month’s article you mentioned the term “innogration” when reviewing tech stocks? Can you explain that again?

LB: Sure.  I use the term “innogration” to describe the combination of innovation and integration that all tech companies must employ in order to remain competitive.  It means that they must not only continue to innovate internally, but they also have to acquire complementary innovations from external sources to produce a leading edge product.

ID: So is this what FANG stocks are missing?

LB: Yes and no. Google and Amazon are companies which innovate on their own and integrate other core technologies into their products, whereas Netflix and Facebook are still primarily going to market on what they built internally. However, in looking at innogration there are better companies to invest in the near term compared to the premium one has to pay for a Google or an Amazon today.

ID: So let’s go back to Apple.  You made a good call on Apple last month when you said it was overvalued, but now that most of the premium is no longer in the price of Apple stock is that a better company to buy versus the FANG companies?

LB: Yes, because they are innovating and integrating which means they don’t have to buy other companies to grow and they improve the differentiation via innogration. I would have to say that there are even better companies out there than Apple. Though on a scale Apple would be higher than Google, I would say Microsoft would be a better near term investment than Apple. Microsoft’s recent investment into taking Dell private gives them the same capabilities as Apple to manufacture hardware in addition to their software. Since Microsoft trails Apple in market share for smartphones they trade at a significant discount instead of premium while they continue to generate revenue from a PC market which has begun its initial descent. When you add in Microsoft’s dividend you get what I call a “tech mutt” – a play on the old Dow Dogs concept. An even better bet for the long run is Verizon, as it would be ranked higher than Microsoft for investor returns.

ID: Last month we basically categorized each stock as either a ‘winner’ or a ‘loser’, so are you saying that Verizon, Apple and Google are long term winners, and Facebook and Netflix are long term ‘losers’?

LB: Yes, I suppose I am.  That’s not to say that Facebook and Netflix can’t turn things around, but in order to do so they would need to acknowledge their shortcomings and make a full commitment to innogration in order to avoid ending up on the scrap heap.

ID: I’m intrigued by your notion of innogration.  Can it be used to evaluate all tech stocks?

LB: Yes it can.  The challenge is in having access to the relevant data in order to accurately measure the extent to which they are practicing innogration.  With larger companies it’s not difficult to do because they are so visible, but with the smaller companies it’s a little easier for them to fly under the radar.  It’s hard for someone like a Facebook to spend $100 million without everyone finding out about it, but much easier for a start-up to spend $10 without attracting attention to itself.

ID: Okay, so next time we talk I’d like for you to take your concept of innogration and apply it to an entire sector of tech stocks using the same metric for all of them.  I can already say that I see some of the broad outlines of what that might look at from how you have ranked the investment opportunities today. Would you be willing to do that?

LB: Absolutely.  In my opinion it is the only way to evaluate tech stocks of all different shapes and sizes with a single metric that can accurately predict their long term outcome.

Part 3: The Ins and Outs of Innogration (06/17/2013)

ID: First of all, let me congratulate you on saying back in January that Apple stock would be a ‘buy’ at $400/share, as recently it dipped below $400 before bouncing back up above it.  How do you feel about that?

LB: Needless to say I wasn’t surprised at all. It got way ahead of itself and was clearly overvalued. 

ID:  So is it now undervalued, or is this a case of trying to “catch a falling knife”? 

LB: No, Apple is a long term buy at $400.  It all goes back to the idea of “innogration” that we have been discussing.  It has enough cash to continue to both innovate internally, and to also acquire the external resources necessary in order to integrate those technologies with their own in order to create a market leading product. Apple has done this in the past and continues that kind of strategy in the post Steve Jobs era.  In the long run that will overcome any short term concerns about their product line. 

ID: Let’s talk about your concept of innogration in more detail since it is central to how you evaluate each company as a potential investment.  Can you tell me exactly what it is, and how you quantify it?

LB: Yes I can.  First I calculate the extent to which a company possesses the resources to create a market leading product, or “innograte”, and then I determine the extent to which they are acquiring the correct resources to do that. 

ID:  So let’s take a closer look at each part of that equation.  What do you look at to determine if a company is possesses sufficient resources to be able to innograte successfully? 

LB: Two things: (1) is it returning enough earnings to investors in the form of dividends in order to continue to attract investor capital, and (2) is it able to grow cash flow at a rate high enough to be able to buy outside resources necessary to compete in the marketplace?  I assign a value to each of those variables based on their financial performance. 

ID: Okay, that makes sense.  But how can you determine if a company is spending that money wisely?  Just because they buy an outside resource doesn’t mean it will work out. 

LB: That’s obviously true, and we need look no further than HP’s acquisition of Autonomy to know that.  However, we know there are only two major strategic areas being feverishly worked on within the industry – Cloud and Client endpoint technologies. Everything is going either into a supporting or direct play for Cloud and Client endpoint technologies. Knowing this one can make an accurate estimation of how close a company is to converging on one of these two targets. 

ID:  That sounds more subjective than objective, so are you able to quantify that? 

LB: Over the years I have refined my process to where I am now able to assign numerical values to the level of strategic convergence a company is working to achieve. 

ID:  So you have three values that reflect dividends, cash flow, and convergence.  What then? 

LB: I add them up and the sum total represents that company’s relative strength, which is what I refer to as innogration. The highest score a company can get is a 10, and the lowest is a 0.  Anything over a 5 is a likely winner, but less than 5 is a company that has very low odds to be a winner unless they do something drastic to turn things around.

ID:  Alright, then I am going to call it the BiQ, for “Boeckl Innogration Quotient”.  How does that sound? 

LB: I like it – I just wish my name was easier to spell!  But seriously, the BiQ, as you call it, really can tell you which companies are still going to be around five years from now, and still doing well. 

ID: If that’s true, then that’s very exciting from an investment perspective.  Can we go over a few tech stocks to see how they score on the BiQ scale? 

LB: Sure, throw a few names at me.

ID: Let’s start with Apple since we have been talking about it so much.  What kind of BiQ does it get right now? 

LB: Apple has a BiQ of 8.5, which is very strong.  They are getting a lot of negative publicity right now, but as far as I am concerned that is a buying opportunity.  They have a lot of cash, and they know what to do with it. The only concern which I have for Apple is in how long they continue to keep their prices and margins so much higher than say Samsung’s smartphones which are now pretty good. The smartphone tech market is starting to commoditize and if Apple had the pricing worked out already they would likely stand atop of the scale.

ID:  How about Verizon?  In our first interview you identified Verizon as the best tech stock to buy in this market.

LB: Verizon has a BiQ of 8.0 which is also quite good.  By the way, when I recommended Verizon stock as a buy back in mid-January it was trading around $42; now it’s at $50 so I feel good about that. 

ID: Back in January you also said that RIMM was a long term loser, but its stock (since renamed BBRY) has gone up slightly?  Why is that?

LB: Again, my model is long term in nature, and is not based on the current price of a stock.  Some of these companies become so undervalued that, even though they are a long term loser, in the short term there is still some investment opportunity. 

ID: That brings up a good point.  While the BiQ indicates the long term prospects for a company, it does not take stock market values in to account so how do you convert the BiQ to a stock recommendation?

LB: You’re the investing expert, so why don’t you figure that one out!  I believe we would need to find a way to convert the absolute value of the BiQ to a relative value based on stock market valuation.  You’ve been a stockbroker for thirty years, so I’m sure you and I can figure out a way to do that.

ID: I like it!  Let’s talk about that next time and come up with a list of the ten best tech stocks to buy now based on the BiQ.  If I can do that, then our subscribers could make a lot of money on tech stocks.

Part 4: Using Innogration to Identify Tech Stock Winners and Losers (08/14/2013)

ID: In our last interview you outlined the components of the “Boeckl Innogration Quotient”, or BiQ, and how that helps you determine if a tech stock is going to be a long term winner.  What I’d like to do today is discuss the idea of combining the BiQ with a stock market valuation metric to identify which one of those companies is also a good investment opportunity.  How do you feel about that? 

LB: I’m all for it, as I don’t claim to be a stock market guru.  My model can tell you which tech companies are going to make it, but it can’t tell you which ones to buy today.

ID: There are a lot of stock market metrics to consider, but it seems to me that you are telling us at this juncture in time the unique nature of tech companies would render most stock market metrics somewhat useless. 

LB: When the current core of information technologies came into existence in the early 1970s they were created inside of the company selling the technology. Microsoft and Apple were great examples of this back then. However, as the I.T. industry grows in size and continues to mature, the products become increasingly complex. No single company can invent it all, so at this juncture you have to look at companies who are both innovating AND integrating other companies’ inventions within their own products. The companies which do this will succeed, and the companies that don’t innograte will lose market share to the winners.  

ID: Okay, so if we rule out any metric that is a ratio based on things such as book value, inventory, etc., that pretty much only leaves intangible items. 

LB: I’d say let’s take it one step further; tech stocks may be the purest play on earnings since there is so little room for financial gimmickry.  The reason why a lot of those other metrics came into being in the first place is that earnings became increasingly misleading as most other industries increased their use of accounting tricks for things such as depreciation to minimize taxation. Since tech stocks don’t have as much opportunity to take advantage of those tax minimization strategies, their earnings tend to be much more representative of their true condition.

ID: That being the case, it seems to me that we could simply take the BiQ and multiply it times a factor based on earnings to determine if a particular company is fairly valued compared to its peer group.  Does that make sense? 

LB: Absolutely.  However, I suggest you look at future earnings instead of past earnings since they can change so dramatically in a very short period of time.

ID: I agree, although past earnings are a fact and future earnings are an estimate, so I’d only feel comfortable using the forward twelve months (FTM) earnings estimate and nothing more. 

LB: Quite frankly, it’s very difficult if not impossible to accurately estimate earnings for tech companies more than twelve months out anyway, so that’s fine. 

ID:  Then let’s take a quick look at some well-known tech stocks and see what happens when we convert their BiQ to a stock market adjusted value.  Let’s start with Apple (NASDAQ: AAPL) since we have discussed it so much. 

LB: At $450 Apple is a buy, and here’s why: According to my methodology, Apple has a BiQ of 7.6 due to its high dividend, growth in cash flow, and strategic direction.  Even better, its FTM is only 12 versus an industry average of 14.

ID: So if we multiply the BiQ for Apple (7.6) by its relative earnings multiple (14/12 = 1.14), then its overall score would be an 8.66.  That sounds good, but let’s take a look at some others to see how it compares.  How about Verizon, since it seems to be an industry favorite? 

LB: Verizon (NYSE: VZ) is an industry favorite for very good reasons which are reflected in its BiQ of 8.0.  However, because it is so popular with investors its FFV is 18 versus its industry average of 13 which reduces its overall score to 5.7.

ID: So even though you score Verizon almost as high as Apple on your BiQ scale, Apple is actually a better investment right now due to its lower valuation. I like the counter intuitive aspect of combining these two metrics. 

LB: Here’s a more extreme example: Everybody is talking about three-dimensional printing these days, and for good reason – it is clearly an industry with tremendous upside potential. I score DDD as a 6.0 on the BiQ scale, but since its FFV is so high (46) versus its industry average (15) the resulting score is only a 1.9 so I wouldn’t buy the stock at current prices.

ID: How about the opposite situation; can you think of a company that only gets an average BiQ score, but is trading at such a low multiple that it would be a good investment? 

LB: Sure, that’s why a disk drive manufacturer like Western Digital (NASDAQ: WDC) is doing so well.  Its BiQ score is only a 6.5, a little above the midpoint, but its FTM of 7.95 is almost half of its industry average of 14.  That gives it a combined score of 11.5, twice the score for Verizon!

ID:  Very interesting.  Now let’s take a look at Research in Motion (NASDAQ: BBRY), which you have said several times is a long term loser and bad short term investment. 

LB: Actually, BBRY is the lowest scoring tech stock of them all.  In fact, its BiQ is a zero since it pays no dividend, its cash flow is violently contracting, and its strategic direction is completely off the mark. It’s a very risky investment looking out over the long haul.

[Editor’s note: since this interview was submitted for publication BBRY has announced that it is selling itself to the highest bidder, an admission that it is unable to overcome its mounting financial challenges] 

ID: Let’s close with the granddaddy of them all, Microsoft (NASDAQ: MSFT).  How does it score?

LB: Actually, Microsoft only scores a 4.5 on my BiQ scale, but believe it or not it is trading at a pretty substantial discount to its peer group (FTV of 12 versus 24 for peer group) so its total score is 9.6, which makes it a good investment at current prices. 

ID: So if we lined up those five stocks based solely on their BiQ scores then the ranking would be: 1 – Verizon, 2 – Apple, 3 – Western Digital, 4 – Microsoft.  But if we rank them based on their total score as stock market investments then the ranking changes to: 1 – Western Digital, 2 – Apple, 3 – Microsoft, 4 – Verizon.

LB: And that’s what a lot of people don’t understand.  Most investors tend to buy stocks based on the same factors that drive the BiQ score, without regard to relative valuation.  As we were reminded all too painfully from Apple during the past year, tech stocks have a habit of getting way ahead of themselves and then crashing due mostly to investor sentiment.  By combining the BiQ with an objective, quantifiable metric that identifies relative value we can protect ourselves from buying into overvalued situations. 

ID: While we are that subject, let’s discuss Facebook (NASDAQ: FB).  Recently the price of its stock jumped from the low 20’s to the high 30’s based on increased optimism over its revenue model.  How does Facebook score on the BiQ, and is it a good investment right now?

LB: Perhaps more than any other tech stock, Facebook personifies the fickle nature of the market.  A month ago you almost couldn’t give it away, and then suddenly you almost can’t pay too much for it!  Here’s the problem from a long term perspective: Facebook is almost entirely dependent on an advertising revenue model, similar to Google.  The big difference between now and then is that so many more consumers use handheld devices that make it much more difficult to respond to advertising.  The size of the screen simply does not allow for some of the essential elements of an effective advertisement.  Eventually advertisers are going to figure that out, and will not be willing to pay as much for it. 

ID:  Okay, then that aspect of their business model should be reflected in the ‘strategy’ element of Facebook’s BiQ score, correct?

LB: That is correct, and why they only get a 1.5 on my 4 point scale for strategy.  Combined with the 0 it gets for not paying a dividend and a 3 for cash flow gives it a BiQ score of only 4.5 on a 10 point scale. 

ID: And when we multiply that BiQ score by our market value adjustment, the result is a score of 2.3, which is quite low.  If our combined formula is correct, then Facebook stock is grossly overvalued and should not be bought.

LB: That’s right, but you would have a hard time convincing most people of that right now.  Of course, the biggest gains are made when you are willing to do the opposite of the majority and turn out to be correct, and the biggest losses are avoided for the same reason. 

ID: I think that last statement would be a very fitting end to our series of interviews on investing in tech stocks during the past eight months. I believe your concept of “innogration” is truly unique and extremely useful in evaluating tech stocks.  Hopefully we can find a way to make your expertise available to our subscribers on a regular basis. Thank you for your time.

LB: You’re welcome.  The one thing I can tell you for sure is that there are still a lot of fortunes to be made in the tech sector in the coming years, and investors who pick the right stocks can do very well for themselves.