I see a lot of bargains in the markets these days. If you have some patience, in the current environment there are likely some of the best opportunities in decades. The dynamics of modern markets make it such. We have become all or nothing investors, constant purveyors of the greater fool theory. Everyone is either in a name or everyone is out. Very few will stand on their own, shun the IBD and evaluate a company on its individual merits or valuation prospects and/or limitations. This dynamic creates many egregiously overvalued stocks and a lot of conspicuously (if noticed at all) undervalued stocks. But that changes.
Look no further than the carnage left behind by disappointing past year favourites NFLX, GMCR, SODA, APKT and FSLR. I am here to rain on this parade and force some thinking outside the box of the current growth/momentum preoccupation and get back to some good ole fashion growth at a reasonable price/value stock picking. There are better ways than jumping on board and hoping for the best when valuations are already stretched. Let’s start with multi-year underperformer, perhaps even dog, Sony Corp.
Sony (NYSE: SNE) $17.83
Why I like Sony Corp @ current prices:
- Everyone hates Sony. This alone is a big positive for the stock going forward should financial performance improve. The stock trades a fraction of revenues (Price/Sales of less than .25) with a market capitalisation of close to $18 billion (USD) on over $80 billion in revenues. This compares to other technology hardware companies trading between .5 and 1 x revenues or higher. Korean competitor Samsung Electronics (005930.KS) sports a market valuation of over $150 billion (USD) and trades over 1x revenues.
Other Japanese consumer electronics companies like Panasonic (NYSE: PC) have valuations as low as SNE but lack the catalysts I see for SNE going forward. Hewlett Packard (NYSE: HPQ), even after recently having its share price cut in half, still trades closer to .40 of revenues in line with Dell (NasdaqGS: DELL ), another U.S. based computer hardware provider. In recent years, profitability has been stronger at these companies, but should SNE management be able to capitalise on recent restructuring and strategic actions, corresponding margin expansion should impact the bottom line significantly.
I believe SNE has a much stronger brand and product suite to leverage into the connected digital media consumer market than most of its competitors, including Samsung. In Google’s fight with AAPL for digital media consumption supremacy, SNE seems to me the most worthy hardware partner.
- Sony buys out partner Ericsson refocusing its efforts on gaining market share in Android based smartphone market exclusively under Sony banner. From Times of India:
The company is banking on the huge growth potential in the smartphone category to also push its profitability. “Last eight quarters have been good for us and we are proud of that. We went from focusing only on volumes to value but the big setback was what happened in Japan with the Tsunami, which put us back for this year quite a bit. But we are going in the right direction,” Tear said. The target is to become the number one Android player in the smartphone segment, he added.
With Sony’s expertise in consumer electronics and gaming this decision by management makes a lot of sense to me. The company can now focus on developing a suite of industry leading consumer electronics all connected and running on Android. I don’t see another company that has a better foundation from which to launch this assault on the only real competition, connected media leader, Apple. With a full line of Android powered connected Sony products, from smartphones, televisions/flat panels, computers and tablets to gaming and a broad catalogue of multi-media content, Sony/Android should make a formidable foe for Apple as competition for connected media consumer heats up.
Sony’s Playstation already introduced games for Android, and early last year announced Playstation Suite, a platform and SDK for game development on the Android platform. The future of gaming is unlikely to be console based and Sony is anticipating and properly positioning for this future. Having a multiplatform platform gaming suite could be very powerful and Sony is opening the door for game developers and hardware companies to access this market.
“This isn’t an ecosystem where we want to keep everything within the Sony family,” Hirai said during a public interview with the Wall Street Journal’s Walt Mossberg. “This is not just for Sony devices.”
“That’s the beauty of Android,” he added. “We’re in discussions with non-Sony companies to bring them on board. We’ll make those announcements when it’s time to go public with it. This is not just for Sony devices.”
If Google poses the biggest threat to Apple’s connected consumer dominance, then Sony has hitched its fortunes to the right wagon. Unlike current market cap Android phone leader Samsung, Sony has a vast arsenal of proprietary content, gaming, and audio and video with which to compete. The wild discrepancy in valuation between Samsung and Sony seems wrong given the prospects going forward.
This valuation disparity further ignores the fact that Sony has a long history of consumer electronics innovation relative to its rivals. The efforts at Sony are certainly still a work in progress but given current valuation and sentiment the stock appears attractive. If Sony can gain traction with its recent strategic moves and restructuring, at a Samsung similar valuation of 1.5x book, the stock can reach at least $45/share which is more than a 150% gain from current levels.