This Great Profit Play Has Another Catalyst Coming

Michael A. Robinson

Over the summer, I told my Strategic Tech Investor readers a great way to get two stocks for the price of one through corporate spin-offs.

You may recall that this is a process by which a parent company separates a business unit into a stand-alone outfit and then issues shares in the new operation to the public.

The great thing for investors is that by owning stock in the parent company, they generally get shares in the spin-off automatically as special dividends, often tax-free.

At the time, I mentioned that a spin-off from computer storage leader EMC Corp. (NYSE: EMC) should do particularly well.

The spin-off company, Pivotal, marks its one-year anniversary this month as it continues to gain traction in the Internet realm.

And that means EMC is getting traction, too. Lots of traction, in fact.

And that makes EMC a stock that we want to own. Let me show you why…

This Company Was Always a Leader

You'd be hard-pressed to find a savvier company than the Hopkinton, Mass.-based EMC. And let me tell you right now: There's more to this story than just the Pivotal spin-off.

Much more.

Over the past decade or so, EMC has gobbled up more than 70 high-tech companies in a mergers-and-acquisition spree that saw the firm spend about $17 billion.

That's more than the company spent on research and development during that same period.

EMC ranks as a global leader in data storage products that are integral to Cloud-Computing technology, also known as "The Cloud." EMC also makes money by selling services, including storage and data backup.

Truth be told, EMC makes some of the very best hardware for mass-data storage. And it's actually gaining market share, a tough feat for a sector leader that's usually the target of all the other sector upstarts.

EMC, it seems, likes to push back.

A new report by stock-researcher Trefis.com says EMC has managed to hold its lead for at least a decade, an amazing feat when you consider the avalanche of hungry young firms that have launched in the period.

According to IDC estimates, EMC's share of the storage hardware segment is more than 30%. That's about two-and-a-half times that of its nearest competitor, NetApp Inc. (Nasdaq: NTAP).

And EMC has excellent financials. Trading at $27 a share, it has a market cap of nearly $55 billion and sells for less than 13 times forward earnings. It has operating margins of 19%, and a 13% return on stockholders' equity.

EMC recently increased its quarterly earnings by more than 17% and last year brought in more than $4.6 billion in free cash flow (FCF).

Thus, as I see it, EMC ranks as a great foundational play. It has the power to remain a market leader – and high earner – for years to come.

EMC also has deep expertise in high-margin M&As, which will help it further increase its market reach.

But unlike the rest of its high-tech brethren, EMC has an additional potential catalyst that we believe will ignite the company's shares.

Michael A. Robinson

About the Author

Browse Michael's articles | View Michael's research services

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

… Read full bio