‘Wintel’ Duo Still the Best Buys of the Decade

In September, I challenged readers to come up with two tech stocks that are
more unloved than Microsoft (NASDAQ: MSFT ) and Intel (NASDAQ: INTC ) . As I
wrote in September, it's not that investors hated the old Wintel duo.
"Hate" is reserved for more recent fallen stars like Netflix (NASDAQ: NFLX
), which we'll return to later. No, investors were indifferent to Microsoft
and Intel. In the era of smartphones and iPads, Microsoft and Intel seemed a
little like buggy-whip makers in the age of automobiles. There were two major
problems with this line of thinking. First, both stocks were incredibly cheap,
trading at single-digit P/E ratios and yielding more than the 10-year Treasury.
Secondly, both remain wildly profitable and continue to post record earnings.
Intel knocked the ball out of the park last week with its third-quarter earnings
release, sending its share price up sharply. Company profits were up 17% over
2010, setting a new record of $3.47 billion, or 65 cents per share. I believe
Intel eventually will come up with a worthwhile chip product for tablets and
smartphones. Or if not, it'll buy someone else's design. But even if Intel
never successfully breaks out of its core markets and even if the company's
growth rate ground to a halt tomorrow INTC stock would be cheap at current
prices. In fact, Intel could rise by 50% to 100% and still be cheap given the
safety and quality of the company. Ignore the drone of self-proclaimed tech
experts that tell you the PC is dead. iPads are great, and the market for
tablets is expanding faster than the market for desktop and laptop computers.
But Intel's results should be proof enough that the PC market still has quite
a bit of life left in it. Intel trades for nine times forward earnings and
yields 3.6%. Intel is a buy. Microsoft the other half of the Wintel duo also
released earnings last week. Earnings were up a respectable 6%, matching analyst
estimates. Diluted earnings per share were up 10%. Interestingly, the Windows
franchise broke a three-quarter slump, showing modest gains in sales of the
operating system in the last quarter. I might add that Microsoft was able to
post these gains in a sluggish economy with the highest unemployment in 30
years. Cash-strapped businesses and consumers aren't exactly queuing up to buy
new computers, choosing instead to get a little more wear out of their existing
equipment. That Microsoft is able to grow its sales and profits in this
environment is testament to how essential its products are in the modern world.
Microsoft, like Intel, finds itself in the position of having to convince
investors that it still is relevant in the age of the iPad. PCs just aren't
cool anymore.