Here Is Where Value Remains in Today's Stock Market

NEW YORK (TheStreet) -- Even though he's becoming more cautious about stocks, as any value investor would, Dan Ferris, the editor of Extreme Value, hasn't stopped looking for "safe, cheap stocks that are priced right."

In an interview with Ferris on Friday, Feb. 15, I asked him his secret for uncovering the "world-dominating dividend-grower" companies that are still fairly priced. "Ask a better set of questions," was his modest answer. He and his research team have been doing just that, and the results are impressive.

That's why many well-known money managers follow his recommendations. He watches sentiment surveys and balance sheets, not what the masses are chasing. Ferris also wants to catch the massive shifts as they're happening and identify the most powerful corporate beneficiaries.

There are many opportunities to benefit from what Ferris calls "The Pillars of Hyper-Innovation" that are happening now in the world of technology. As an example, Ferris pointed to the phenomenon of "Moore's Law," which had correctly predicted that the number of transistors on a computer chip would double every two years.

"During that time, the computer industry jammed more transistors onto computer chips every two years, just like Moore said they would, using thinner materials packed closer together. The first chips had a few thousand transistors on them. By 2007, they contained more than 600 million," he explained.

Then came 2007 and researchers hit the physical limits of silicon dioxide, a key material in chip-building. Manufacturers literally had no way to shrink the material a single nanometer more. That's when the "world dominator" of semi-conductor manufacturing stepped to the plate and showed the world what hyper-innovation was all about.

Intel ( INTC) realized that a global tipping point had arrived, and in 2008, introduced its Core i7 processor chip with 731 million transistors. These new chips had 2.5 times more transistors than the 291 million transistors in its earlier Core 2 Duo chips, which were introduced in 2006.

"It took the leadership of Intel to see the challenge and to meet it head on," Ferris explains. "Intel had the deep financial resources and has been dictating the pace of innovation for decades. Today it employs the biggest concentration of chip-engineering talent in the world."

In the current edition of Extreme Value, Ferris introduces the fruits of his latest research in this area of technological brillance.

Here's a brain teaser: "We've found a well-managed, well-financed company that has all the big semiconductor-makers (like Intel) as customers. This company is a "picks and shovels" way to play this long-term technological trend." Out of respect to his subscribers, he will not name the company, but shares the following description:

"The semiconductor-makers need this company's technology whenever they build new plants or change technologies ... which they do every year. This month's recommendation will continue to see plenty of business from all the major players in the industry. Chip-makers can't build cutting-edge technologies without it."

With a little poking and prodding, I hope to be able to share that company's name and symbol in one of my next articles. In the meantime, Ferris would say that INTC is "a great buy right now" and he predicts that the dividend will be rising in the quarters and years ahead.

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This will be possible as Intel eventually benefits from the huge capital expenditures and build-out it's been making to capture the lion's share of the business profits that providing these new state-of-the art micro-chips will bring. "Intel will have huge orders and revenue flows because it's the innovation leader."

Here is the one-year chart for INTC showing us its price movement, trailing 12-month operating margin and its cash from continuing operations.

INTC Chart INTC data by YCharts

Ferris believes when Intel reports its most recent quarterly results on April 16, it will also reveal how it intends to sustain and grow its current 4.2% dividend yield. The payout ratio is around 41% and as earnings increase, that ratio will drop, which will be part of the catalyst for increasing the dividend.

As the interview concludes, I ask him if he knows of any other "world-dominating dividend growers" that are still a relative good value. Without hesitation he says, Microsoft ( MSFT).

"Microsoft is a buy up to $30-a-share, from my perspective," Ferris opins.

Ferris believes the stock has upside potential, if Windows 8 is enough of a success. "The personal computer isn't dying, as hundreds of millions of PCs are still being made each year. Windows 7 sold over 600 million copies," he reminds.

Also, MSFT just came out with Office 2013. "Its business software division is thriving and generates huge amounts of cash!" Then Ferris, who likes MSFT's forward PE of less than 9 and its 3.3% dividend yield, representing a 45% payout ratio, made a remarkable observation.

"In the quarters and years ahead, MSFT will continue raising its dividend by double-digit amounts." He wrote a letter to the board of MSFT telling them in essence, "... you'll give shareholders more value and your stock could easily double in price if you'd repatriate the massive cash holdings you keep in foreign banks to avoid taxes."

As of the most recent quarter, MSFT was sitting on more than $68 billion in total cash, with a little more than $14 billion in debt. Ferris believes that it should follow the example of Expeditors International of Washington ( EXPD), which provides logistics services in the United States and internationally.

In a 2011 8-K filing, the CEO of EXPD tackled the topic of bringing home to America what a company earns overseas, paying the taxes and using the net cash profits to reward its employees and the company's shareholders. You can see from the chart below this approach hasn't hurt EXPD's share price, in spite of a tough worldwide economy during the past four years.

EXPD Chart EXPD data by YCharts

EXPD steps into the earnings confessional on February 26. There are good reasons to anticipate an improvement in its operating margin and trailing 12-month cash flow from continuing operations. It has no debt and almost $6 billion in total cash as of the last quarter.

"In the February issue of Extreme Value, we recommended a company that dominates its market, has a ton of cash on the balance sheet and gushes free cash flow, year after year. We believe its business will grow substantially in the next few years, due to several industry trends we detailed."

Extreme Value isn't for everyone, as Ferris points out. "It's for patient, intelligent investors who understand that a business' value is what ultimately determines the value of its stock. Most people simply can't tolerate a two- to three-year wait in a safe stock. They want it all right now.

Extreme Value investors are different." That's part of what made this interview so interesting. Stay tuned for more insights from my interview with Dan Ferris, in future articles.

As of the time of publication, Courtenay was long INTC and MSFT.

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