Tags: Smead | tech | die | cash

Fund Manager Smead: Technology Stocks Are 'Where Cash Goes to Die'

Tuesday, 28 May 2013 10:34 AM

By Michael Kling

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The "bulbous" amounts of cash that large tech firms like Apple hold make them poor investments, according to Bill Smead, CEO and chief investment officer of Smead Capital Management.

"We've done a lot of research in the last six months in that area. And unfortunately, we've come to the conclusion that tech is where cash goes to die," Smead told CNBC.

"I think it's because there's not enough tension — you don't make very good decisions what to do with cash when you've got way too much of it — unless you're Warren Buffett."

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Academic research, he noted, shows that companies that are extremely over-capitalized perform as badly as undercapitalized companies.

Apple reported holding $145 billion of cash and investments in its second quarter filings. Microsoft has $74.5 billion cash stockpile, and Google has $50.1 billion.

"Most of these companies don't come into life being great investors or great capital allocators," he said.

Smead faulted Microsoft in particular. Although his fund held Microsoft stock in the past, the tech company lacks "shareholder friendliness," he explained. And Microsoft has continually failed to benefit from online opportunities.

"They've probably lost more money in the last 13 years in the online business than any single corporation has lost in a 13-year stretch in history," Smead told CNBC. "They lose money on each dollar of sales and they've been trying to make it up on volume."

Some investors and other commentators think high-tech firms should trim their large cash holdings to grant their investors dividends. But to give dividends, they must bring the funds back to the United States from offshore tax shelters and face a tax bite.

In order to avoid taxes, Apple took on $17 billion in debt to finance dividends.

Google will eventually take a similar action, Bernstein Research analyst Carlos Kirjner wrote in a note to clients. He predicts the Internet giant will return cash to investors in late 2015 or 2016, according to The Street.

Until then, Google will hold onto its giant treasure chest for possible acquisitions and research and development of new products. Google has purchased Motorala Mobility, YouTube and Android in recent years. It is spending research and development funds on new projects like Google Glass and a self-driving car.

Following Apple's example, Google may wait until it accumulates about $100 billion before deciding to pay dividends, Kirjner wrote.

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