Image Source: Unsplash

Selloffs, downturns, pullbacks, corrections, and even bear markets are events that equity investors have always had to endure on the way to the best long-term performance of any of the financial asset classes.

So we can hardly be surprised that the recent downturn in stocks has extended to a second week, especially as we are in the seasonally weak September-October time span. Indeed, September and October are the only two months where returns on stocks have been negative dating back to 1927.

Note that the so-called Fed model suggests that the yield on 10-year Treasuries should be similar to the S&P earnings yield, which is the inverse of the P/E ratio. If the 10-year is greater than the S&P earnings yield, a market is overvalued. And if the reverse is true — as we saw on Wednesday — a market is undervalued.

Though many dismiss the Fed model, investing is always a choice of this or that, and we like the recent rich (and rising) earnings yield (3.76% vs. 1.36% on the 10-year) and the S&P 500 dividend yield of 1.34%. Meanwhile, here are updates on some of the technology stocks in our portfolio:

Cisco Systems (CSCO) hosted its annual Investor Day on Sept. 15, which featured CEO Chuck Robbins and included a boost to long-term expectations. The comments spurred several upgrades from analysts as the top-line growth targets were better than expected, but there remained some concern that CSCO may not be able to accomplish the same growth rates for earnings.

We continue to believe IT spending will remain strong, and we think CSCO should benefit as the world slowly recovers from the pandemic. Unfortunately, Cisco is not immune to the pricing and supply chain challenges that are dragging on the industry recently, and the company thinks those headwinds will stick around at least through the end of this calendar year.

While 2020 was a bit of a struggle for CSCO, shares are up nearly 30% this year, which we believe is a result of investor enthusiasm, an inexpensive valuation, and solid post-pandemic earnings growth projections. We continue to find CSCO to be a value-priced stock with decent long-term growth potential. Our Target Price has been bumped to $68.

System software firm Oracle (ORCL) posted adjusted earnings per share of $1.03, versus the $0.97 estimate, in fiscal Q1 2022. ORCL had sales of $9.73 billion, coming up a little short of the $9.77 billion estimate.

Total cloud services and license support revenue was $7.37 billion, narrowly trailing the $7.40 billion consensus estimate, thanks to back-office applications Fusion ERP and NetSuite ERP, as well as triple-digit booking growth in infrastructure. Oracle’s operating margin was 45%, 2.5% ahead of the analyst consensus.

Oracle repurchased 94 million shares for $8 billion in the quarter, bringing the total percentage of shares that Oracle has bought back over the past decade to 46%. In fiscal 2021, ORCL paid out $3.2 billion in dividends and is maintaining the quarterly dividend of $0.32 (which pencils out to a 1.5% yield). The forward P/E is under 18 and the free cash flow yield is 5.1%.

We remain encouraged by successes despite the pandemic upsetting some of the company’s sales process, and we believe that ORCL still has the right leadership team in place as the company adapts to a dynamic cloud business.

The shares have gained more than 35% this year including dividends, so the retreat from Aug. 17’s $90.95 high hasn’t caused us much consternation. We have always liked ORCL’s relentless pursuit of the #1 spot in any competition. Our Target Price has been raised to $96.

Computing giant Microsoft (MSFT) launched a massive $60 billion share buyback program and hiked the quarterly dividend payment by 11% to $0.62 per share. The program has no end date (and included a note that it could be terminated at any time) and would reduce the share count by about 2.7% at current prices. The new plan replaces the existing 2019 plan which had $8.7 billion of the original $40 billion left as of June 30.

The buyback announcement comes at a time when some Democratic party leaders have proposed a tax of 2% on share buybacks. Of course, there’s a long way to go in D.C. and it’s far from a certainty that there will be any tax on buybacks, which is perhaps why Microsoft went ahead with their announcement.

The company remains one of our larger holdings, a position we are comfortable with at present, as it has seen tremendous growth in Azure, complemented by growth in the Xbox gaming platform and business-social network LinkedIn.

We think the growth trends are unlikely to slow for the foreseeable future, a result in part of MSFT cementing its position in the tech world during the pandemic. Of course, technology changes quickly and Microsoft can’t rest on its laurels, but for now, the company’s position looks robust. Our MSFT Target Price has been increased to $323.