PC Stocks a Bargain Ahead of Windows 8

The Kelly Letter Excerpt
The following is from this year’s Note 52 of The Kelly Letter, which went out to subscribers last Sunday morning.

This weekend’s Barron’s cover story shows a tombstone inscribed, “R.I.P. PC” beside this teaser: “As the personal-computer era wanes, Microsoft and Intel scramble to remain relevant. Apple and Google feast on the spoils of tablets and smartphones. What last week’s scary earnings reports mean for investors.”

Ah, the bottom tick. Magazine covers are notorious for arriving at the end of a cycle. A BigTrends.com look at bullish and bearish cover stories over the past 30 years found that the market moved opposite these calls more than 70 pct of the time. The reason? Expectations are pushed to the extreme edge, which is almost never real. As the saying goes, things are never as good or as bad as they seem. Thus it is with stocks. Is the PC industry having trouble here ahead of the Windows 8 release? Yes. Is it dead? No.

The opening paragraph of the Barron’s story follows the script: “When Microsoft introduces its long-awaited Windows 8 operating system Friday, it will be the first Windows rollout to face real competition since, well, forever. Today, smartphones and tablets do almost all of the day-to-day tasks a PC does — including sending e-mail, surfing the Web, and editing photos — and do some of them better. Already, tech investors, long accustomed to a lift from Windows, are primed for disappointment.”

Yes, primed for disappointment. Expectations are low. Nobody thinks much good will come of it. That’s why stock prices are so compressed going into the release. What if the disappointment isn’t as bad as expected? What if people like Win 8? What if companies decide it’s a good investment to keep their legacy software humming for another generation? What if Microsoft saw the trends, too, and decided to release its own Surface tablet along with Win 8 to show that Windows has evolved to the multi-device world?

Longtime readers know that I’m no fan of Microsoft, despite our having owned it in the past. Even I, however, respect the resources it’s poured into Win 8 and have seen what needles the company can move when it goes into a marketing frenzy. The mistake I think analysts and others are making is in equating “PC” with just beige desktop boxes. Part of this makeover of Windows is to get it on more devices than desktops. The same way Apple is not confined to just its Mac line, nor is Windows going to be confined to just desktops and laptops. It, too, will play a part in the move to smaller devices and, presumably, so will its partners in the PC industry.

AP tech writer Peter Svensson wrote Friday that “consumers are in for a shock. Windows, used in one form or another for a generation, is getting a completely different look that will force users to learn new ways to get things done.” Sounds bad, right? But why is it a new look? Because “Microsoft is making a radical break with the past to stay relevant in a world where smartphones and tablets have eroded the three-decade dominance of the personal computer. Windows 8 is supposed to tie together Microsoft’s PC, tablet and phone software with one look.” Well, isn’t that addressing the very irrelevance that analysts accuse the PC industry of facing?

Walt Mossberg’s review captured this even in the title: “Windows Pushes Into the Tablet Age.” He wrote that the new Start screen that replaces the old Start Menu is “not just a menu, it’s a whole computing environment that takes over the entire display… a handsome, modern, slick world of large, scrolling tiles and simpler, full-screen apps best used on a touch screen and inspired by tablets and smartphones… This is a bold move and in my view, the new tile-based environment works very well and is a welcome step.” He warned that the changes “will require re-learning the most familiar computing system on the planet.”

However, Microsoft “is gambling that the confusion will be brief and will be offset by the ability, via the old desktop, to run traditional productivity apps like Microsoft Office, which can’t be run on the iPad or its Android brethren.”

Whatever it’s going to be, it’ll inject excitement into the PC industry and there’s basically only one way for sales to go. We’re betting that Barron’s called the bottom, and only hope that our orders to buy more PC stocks fill before the new Win 8 holiday sales show up everywhere and revenues rise.

I thought my office assistant put it best. “People are complaining that Windows doesn’t look like it looked before,” I told her. “Right,” she replied. “That’s why they call it new.”

Also in the letter:

The impact of lousy earnings…

Timing the autumn slump and positive seasonality…

Google’s big miss…

And more! Sign up to read the rest of this letter and all back letters, and receive future letters starting this Sunday.

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