Defining Obsolescence

You don’t want to be holding the bag when the market finally recognizes that a company’s core products are obsolete. And yet there are millions of investors that have done that — perhaps a few times over.

Remember Polaroid? Its products were put out at the curb to be picked up by the local Waste Management (WM) guys. Or how about Palm? Sure, it did eventually get sold — but really, it got sold for its scrap value. And, of course, there’s also Kodak, which tried catching on to the shift to digital photography way too late.

The key, of course, to avoiding these sorts of investment mishaps is to know what you’re investing in and why you’re buying it in the first place. Keep asking those questions every time you open your brokerage statements.

When it comes to technology investing, any list of companies at the top of the heap in recent decades has included Intel (INTC). The company has been famed for its chip sets and other products and services that, for a time, were ubiquitous in nearly every personal computer (PC) sold worldwide.

As a result, from the 1990s through 2000, shareholders saw returns soar to the heavens with gains of more than 4,100%. No wonder Intel was on that shortlist of tech stocks to own.

But with any market — especially with the mercurial market for technology — things change. Not only does competition emerge, but demand for goods and services changes, too. So, if you look back on Intel from 2000 through the end of 2010, that decade saw stockholders lose more than 55% of what they had gained in the prior decade.

And during the current decade to date — while positive — Intel has only gained a measly 4%-plus — while the S&P 500, even with all of the general market foibles, is up by more than 35%.

Intel’s peers in the PC market also are hurting. Chipmaker AMD (AMD) lost 73% so far this decade. PC software maker Microsoft (MSFT) is down more than 8%, while PC maker/vendor Dell (DELL) has dipped 5%. All of those companies are tied to the PC business, featuring desktops and laptops, and are struggling to make positive returns.

While no one is saying that PCs are going completely the way of Polaroid, Palm or even Kodak, there is a warning here. More and more folks are using PCs less and mobile computers more.

Meanwhile, demand is rising for smartphones and tablets. That demand for mobile connectivity is spurring the use of chips, components and software. Intel has been trying to be relevant — but it just hasn’t been working.

While Intel management thinks that the company offers a generous dividend — paying 22 or so cents a quarter — the organization also is hoarding cash that it might need to stay alive, unless changes are made.

Meanwhile, as a comparison, look at Samsung Electronics (SSNLF). It is by no means a big dividend payer. But with its focus on mobile devices, it has been trouncing Intel and its PC-fixed peers during the past many years.

In just the past trailing ten years alone, Samsung shareholders have made more than 472% in total returns. This performance is from a company that makes not only the chips and components for nearly everybody else’s smartphones and tablets, including Apple’s (AAPL) products, but also has a very successful business of building its own branded products.

The key is that you always need to look forward with every stock that you own. Forget what worked before, and always ask what is more likely to work in the future. Invest accordingly.

So, when assessing Intel, take a hard look and perhaps take the cash to re-deploy in other stocks that have a more predictable future.