Buy Qualcomm (QCOM) While It’s Cheap

On July 23rd of this year, shares of Qualcomm (NASDAQ:QCOM) stock were quoted at $81.97, representing the highest price they've reached all year. At the time, its P/E ratio was just north of 20. In an overpriced market, for a company of Qualcomm's caliber - whose double digit earnings growth is projected to hold steady in the long term - one would logically think it was a rare bargain at the time.

But the way in which QCOM's priced has moved in recent months has been largely devoid of logic. On Friday, December 12th, the stock closed at $70.59, just 4% above its 52-week low. The price is indicative of a 14% drop which occurred within just 5 months of hitting its high point. That’s a 34% annualized drop in price.

Speculation Has Been Hurting QCOM's Stock Price

...But for any well-known stock, speculative-based price movements never seem to hold steady in the long term.

Whenever a company has at least some level of earnings growth, its stock becomes an attractive target when its price takes a large enough dip to push it into value territory. In the case of QCOM, this would apply at its current price level.

On November 5th, Qualcomm reported Q4 EPS of $1.26 and revenues of $6.69B, missing estimates by 4 and 5 points, respectively. The effect of these "misses" were heightened concerns regarding the company's business, specifically a potential delay in the launch of its newly arriving chip, the Snapdragon 810. At $70.59, the stock now trades $7 below the opening price it was quoted at on the day of its Q4 earnings release. This represents a 10% price drop in just 5 weeks.

Although the company's outlook might seem murky on the surface, do not be mistaken. Qualcomm's price drop has been incredibly irrational. Sure, the company underperformed compared to analyst estimates. That said, how any company performs in comparison to its estimates has absolutely no effect on the long term success of its underlying business, and thus, its stock price. What matters far more is how much the company actually grows – i.e. how its financials compare to its past results, as well as the level of earnings growth that it expects to achieve down the road.

The truth is that Qualcomm's Q4 earnings grew substantially, and they're expected to continue growing in the double digits (annually) through the next 5 years. Investors have overlooked the fact that Q4 EPS represented a 20% increase over the previous year's same-quarter results, and that Qualcomm's FY'14 EPS grew by 17% from the previous year. For a company with a market cap upwards of $115B, these are significant growth rates. But rather than being rewarded for what should be considered an enormously successful quarter, QCOM's stock price was penalized for its quarterly earnings miss which was rather measly to begin with.

Thanks to the irrationality of Qualcomm's investors during these past 5 months, the stock price has been driven down to the point where prospective buyers would do well to purchase shares while they're on the cheap.

An Undervalued Growth Play

Throughout the stock market’s entire existence, the most reliable stocks to own have always been the large, well-known companies which are undervalued despite strong earnings growth. These stocks have the most favorable risk/reward profiles. Investors can sit comfortably on these stocks, knowing the statistical likelihood of generating alpha with their invested capital is rather high. Fundamental cheapness and strong long term growth prospects currently qualifies QCOM to fall in that category.

Before I proceed to explain why, it's important to note that the company has forecast a hiccup in its FY 2015 EPS. According to the most recent guidance, Qualcomm projects next year's EPS to fall somewhere between a 4% YOY decrease and a 2% YOY increase. However, shareholders should not be concerned about this for two simple reasons:

• Earnings are estimated to continue growing at an annual rate that's in the double digits following FY 2015. Theoretically, a stock price represents the future value of cash flows. However, in QCOM's case, those cash flows have yet to be fully seared into the stock price. It will likely happen at some point next year.
• The company will complete its share repurchase program in 2015. The longer the stock price stays down, the more shares it can afford to buy back, and the more money investors will make later. If price goes up now, investors make money now. It’s a win-win situation.

Additionally, at 15.17, the stock's P/E ratio is at a 5-year low point. An investor who buys the stock at its current price will have paid less for each dollar of Qualcomm's earnings than any investor who's bought the stock within the past 5 years.

Coupled with the fact that EPS is expected to grow in the coming years, from a statistical perspective, it's highly unlikely that QCOM's P/E ratio remains near its historical low point for too long. With bottom line expansion to reoccur in 2016, it's a safe bet to assume that another increase in TTM EPS won't be causing that P/E ratio to hit a new low point. That's a rare occurrence, not to mention that such a scenario is counter-intuitive to investment strategy. More investors tend to buy a stock, thus driving up the price, when the company makes more money. The only exception to this rule is a company whose long term earnings outlook is negative, which in Qualcomm's case, couldn't be further from the truth when we look beyond next year.

Finally, the stock's dividend yield is currently 2.4%, which represents an all-time high.

Prediction & Recommended Strategy

QCOM is likely to outperform the market in 2015. In an overvalued equities market, the stock's potential for risk-adjusted returns makes it a far more favorable option than its alternatives.

I suggest buying it now while it's still cheap, adding to your position on any further dips in price, and holding onto it for the long-term. For those of you with less experience using a "buy and hold" strategy, I recommend dollar-cost averaging your shares. Doing so will prevent you from selling your shares before they've generated a positive return.

William Cikos
INO.com Contributor - Equities

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.