Assigning Value to Brains and Brands

As I mentioned in my Bill Gross column last year:

"Using the Bill Gross logic, the Dow would be more valuable if it had more companies like Kodak (EK - commentary - Cramer's Take) and General Motors (GM - commentary - Cramer's Take) instead of companies like Microsoft (MSFT - commentary - Cramer's Take) and Wal-Mart (WMT - commentary - Cramer's Take)."

Since that column was published, Kodak has significantly reduced its dividend payout and now has just a 2.0% yield, while GM pays 4.7%. Both Microsoft and Wal-Mart have dividend yields of roughly two-thirds of 1%.

So is the market "still absurdly expensive," as the emailer says? Before I answer that, let me reveal more from his email:

"If there is a reason, other than some 'new era,' for stocks to remain 'at a permanently higher plateau' vs. their history of more than 100 years, a convincing argument for such a case remains to be heard."

Here, I'm willing to go out on a limb. I think the Dow Jones Industrial Average has morphed from an industrial, capital-intensive, low-profitability, low-return-on-equity average into a much more valuable average based on intangible, intellectually based assets. These assets generate higher profitability, with higher returns on assets.

A New Era

As I said in an earlier column, the Dow Industrial Average has traded up, with low-profit, capital-intensive companies like Anaconda Copper and International Nickel, former components of the Dow a generation ago, having been replaced by "brains and brands," companies like Microsoft and Coca-Cola (KO - commentary - Cramer's Take).

Here's also where you could say I made a mistake in saying that Advanced Micro Devices (AMD - commentary - Cramer's Take) and Corning (GLW - commentary - Cramer's Take) were very overvalued stocks. They are overvalued, if you look simply at the balance sheet and income statement. In the case of AMD, I, as a control investor, can attribute no value to the equity. Maybe the market is saying something else, though. Maybe the market is saying that there are intangible, intellectual assets at AMD and Corning that are not apparent from the numbers in the financials, e.g., the value of their engineering teams, their technological prowess, etc.

At the Top of the Economic Pyramid

If I'm right, that we're in a "new era," for all of the negative baggage that that phrase carries, then it's because our economic paradigm has changed. Our lower-value, capital-laden, industrial-based businesses have been exported to China, Korea, India and elsewhere, only to be replaced, as represented by the brains and brands of the Dow Jones Industrial Average, by the cream of the crop, the top of the economic pyramid. These are companies that, when compared to Anaconda Copper and Industrial Nickel, deserve a better valuation. That's because they are better companies.

Look for part two of this column on Thursday.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Alsin and/or ACM had no positions in any of the securities mentioned, although holdings can change at any time. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, TheStreet.com Value Investor.