In the July 2012 issue of Investor Advisory Service, our Investment Comments turned a little gloomy. For two straight years, April had marked a local high for the S&P 500, followed by a summer lull. We worried that a familiar pattern could be developing in 2012, as a 12% gain from January through April yielded to a 6% decline in May.
Macroeconomic indicators seemed to be pointing to a U.S. slowdown. GDP growth was in the 1%-2% range, too low to support a lasting recovery. The jobs picture seemed to be worsening, with unemployment hitting 8.2%. As bad as those figures were, they looked sparkling compared to the data out of Europe. Deteriorating world growth, along with a weak stock market, made us a little unenthusiastic, although not downright bearish. As the market was turning down it would have paid to be a screaming contrarian. In the last twelve months, the S&P 500 has gained 27%. Yow!
In each one of these Insights columns, we take a look back at one of the three featured companies from our year-ago issue. This month we’ll look back at Qualcomm (Ticker: QCOM), a wireless technology company with content in just about every smartphone and wireless modem on earth. In fact, the few manufacturers who don’t pay royalties to Qualcomm are probably skirting intellectual property laws. Qualcomm’s fortress is built around the “3G” Code Division Multiple Access (CDMA) standard. While 3G is becoming the “old” standard in the U.S., most of the world has yet to upgrade from its 2G phones. Qualcomm will continue printing 3G money for a long time. While price points are lower in developing markets, and therefore royalties to Qualcomm from each new 3G phone are lower as well, the company is creating unified solutions to increase its “wallet share” within new phones. Investors might be surprised how nicely the company’s overall profit per phone holds up.
Meanwhile, the 4G landscape is still evolving, and Qualcomm could easily come out on top here as well. Although widely-touted in phone carriers’ consumer marketing, the reality is that true 4G is still not widely available. We expect that Qualcomm will be less dominant in the 4G world, if only because it couldn’t possibly become more dominant. Regarding the shift to 4G, we said the following twelve months ago:
We don’t have the expertise to try to predict the outcome of this major technology evolution. Historically, as new iterations of wireless standards have slowly grown over old ones, Qualcomm has managed to keep its product line fresh and relevant.
That is still our feeling today. When in doubt, investors should trust the proven winners. In the last four fiscal quarters, Qualcomm’s sales growth has been 28%, 18%, 29%, and 24%. EPS growth has been lumpier, but overall, pretty similar. We don’t expect those trends to tail off soon either, although it’s hard to look out more than about four quarters in the technology sector.
At a recent price of $62.97, plus $1.10 in dividends, Qualcomm has returned 10% in the last twelve months. That’s well below the S&P 500’s 27% gain during the same period. A stock that lags the broader market by 17% has not had a successful year. Considering the strong growth trajectory Qualcomm has been on, an optimist might wonder whether our pick might just turn out to be early? Only the absolute fastest traders can afford to be late and still make money. For most investors, being late means you’ve simply missed the move.