This column was originally published on RealMoney on Feb. 28 at 3:25 p.m. EST. It's being republished as a bonus for readers.

Every pundit seems to be predicting that this year, after all the years of large-cap underperformance, is the year for large-caps to outperform small-caps. I don't agree; I believe small-caps will continue their torrid pace vis-a-vis the rest of the market. The best small-caps will always grow faster than the large-caps on their way to becoming large-caps themselves, and this will get reflected in the outperformance of the S&P 600 SmallCap index.

The point worth heeding here is that certain large-caps are now cheaper than they have been in years, and even former growth wunderstocks are now in what is normally considered deep-value territory. Here are four stocks I like that fall into that category.


Wal-Mart ( WMT) has done nothing but stagnate for shareholders for the past five years, as its chart clearly shows.

However, if we had been shareholders of Wal-Mart during this period, we wouldn't necessarily be unhappy with our current prospects.

Wal-Mart has increased book value per share every year for the past 10 years, including the recession year of 2001. At the end of 2000, Wal-Mart's book value was $5.80, with the share price hovering in the $50 range. Now, with book value at a much-higher $11.67, the stock price is lower, at $45. Wal-Mart's average price-to-earnings ratio during the past 10 years was in the 30s. Now, shares are at their lowest multiple-to-cash flows since the 1970s, at 17. What's going on? Profit margins, at 3.6%, are at their highest levels ever. Revenue and earnings go up every year and return on equity is only slightly lower than its 10-year high.

The main "wall of worry" here is that people are afraid that revenue is so high, at more than $300 billion in the past 12 months, that it can't possibly continue with this growth. But for a company trading at less than 10 times cash flows (as measured by enterprise value over EBITDA), I'm not worried about whether it can maintain a torrid pace of growth. The earnings yield alone is enough to make this a strong buy, even if it never grows again.

Wal-Mart has been stagnant for half a decade

Time Warner

I've written about Time Warner ( TWX) ad nauseam . In fact, I'm nauseated even writing about it right now. Investors complain that Time Warner's stock never moves. However, when I first started writing about it in early 2003 for Street Insight, the stock was hovering around the $10 level. Now 70% higher, trading around $17.27, the stock is still in deep-value territory based on:
  • Breakup value. I'm a believer in the $24-$26 sum of the parts. The AOL division alone, previously thought to be worth zero, probably will be worth $40 billion-plus in an eventual 2008 IPO. The leaves the other $100 billion parts of this company, based on current market capitalization, valued at only $40 billion by the marketplace.
  • Earnings yield. The enterprise value over EBITDA multiple is coming in at 9. On a forward basis, that number goes down to about 7. This is compared with the multiple of about 11 on the S&P 500.


Well, see you later Time Warner, hello Tyco ( TYC)! That's what Carl Icahn is saying, now that he's disclosed that he owns 2 million shares of Tyco. There are various factions activating all around the Tyco battle. Management wants to break the company up, a group including notorious activist investor Louisiana State Employees Retirement System is suing to prevent the breakup, and now enter stage left, Carl Icahn.

I first owned Tyco shares in late February 2002, around the $25 level. The stock was crashing down from a month-earlier high in the $50s as scandal after scandal erupted around Dennis Kozlowski. At the time, the great Herb Greenberg, who was more than bearish on the stock, even wrote that this was no Enron -- that there was definite value in this company.

So where is the stock today? Back at $25 -- only this time without the scandal, less debt ($10 billion in long-term debt instead of $38 billion in 2001), higher revenue, etc. The stock is trading at an enterprise value-over-EBITDA multiple of just 8.2, cheaper than Wal-Mart or Time Warner, and analyst estimates call for double-digit earnings growth into 2007.

Finally, I don't know if Christopher Coughlin is a great investor or not, but when the CFO of the company goes out and buys $255,000 worth of the stock at current prices, as Coughlin did last week, I have no problem investing alongside him.


It seems that everybody hates Intel ( INTC) right now, in part because of the competitive challenge from AMD ( AMD). For some reason, people believe the world can handle only one dominant chipmaker. AMD was a laughingstock three years ago and now is the toast of the town. These things have a tendency to cycle, however, and as Intel gets its competitive juices flowing (and billions more cash at its disposal for research and development and capital expenditures), I wouldn't be surprised to see this cycle going Intel's way again.

Intel trades at 6.7 times EBITDA and 6 times forward EBITDA. Its P/E ratio is 14.64 and its forward P/E is 14.05. By contrast, utility company Con Edison ( ED) has a P/E of 15.6 and trades at an enterprise value over EBITDA of 9.3. Why is Intel being crucified? Is it a slow-growth company? Earnings are expected to grow almost 20% over the next year; this past year, it exhibited 15.5% growth. Return on equity is a not-so-shabby 23%, with operating margins at 31%.

In July 1997, Intel's book value per share was $2.57. Today, it's $6.10. Intel closed July 1997 at $22. Today, the stock trades around $20, despite having increased book value per share every year since 1997, except for a tiny dip in the recession year of 2001.

For more on the value case for Intel, I strongly recommend reading Please Downgrade Intel! from the blog

Intel's size gives it a huge competitive advantage. Here's a quote from Columbia Business School professor Bruce Greenwald that sums the matter up:

"When Intel goes after the next-generation chip, because it's got some degree of customer captivity -- which is crucial to scale advantages -- Intel can expect, if it's successful, to get 10 times as many customers as AMD. That means Intel can spend 10 times as much on developing and marketing the new chip. That's the advantage of scale. So who's going to win that race every time? Intel."

We view owning Intel as owning a toll booth: (almost) every time somebody buys a computer you collect a fee. Sounds like a good business to us!

A lot of people are worried about the AMD threat. We think these worriers have gotten used to having it too good. Might AMD win market share from Intel? It sure might! But who doesn't have competition? UPS has FedEx, General Mills has Kellogg, the Yankees have the Red Sox, and Intel has AMD. Once you accept that every business has competition, what's so bad about being over seven times as large as your competitor? For crying out loud, Intel's cash net of debt equals about 60% of AMD's market cap!

P.S. from Editor-in-Chief, Dave Morrow:
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At the time of publication, Altucher and/or his fund was long Tyco and short Time Warner puts, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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