The price action in Apple stock presents a bit of a quandary. It's hard to imagine better fundamental news for the company, with profits nearly doubling in the latest quarter. But the stock's recent weakness either indicates a pause in its astonishing rise over the past several years, or it is topping out the way the "Nifty Fifty" stocks did in the early 1970's. The group of leading growth stocks from the early 1970's were considered "one decision" stocks, with the only decision being to buy them. Even if they were overpriced based on their current earnings, it was believed that time would bail out the investors, as the superior earnings growth of those companies would make the stocks reasonably priced. Apple seems to be in that category today. Yet, many of the "Nifty Fifty" stocks took twenty years to exceed the levels of the stock market peak in 1973.
Could the same thing happen to Apple stock over the next 10-20 years? It's almost inconceivable today to envision fundamental deterioration at the company. The big difference this time is that Apple's stock is valued at about an average multiple of earnings, and the stock market overall is not extremely overvalued, the way it was in 1973. So Apple has a sizable cushion of valuation that the "Nifty Fifty" lacked. Still, to those fortunate enough to own Apple stock, I'd take some profits at the current level.
Steve Lehman
LehmanInvest.blogspot.com/
Apple: 590
Monday, April 30, 2012
Saturday, April 28, 2012
Spanish Home Loans--A Ticking Bomb?
Concerns over Europe's financial crisis seem to have abated in recent months, as hundreds of billions of euros have been raised to support the system if needed. Spain remains a concern for many, however, despite the assurances of the authorities and the head of the largest bank. (Remember similar assurances in the U.S. at the peak of the housing bubble.)
The condition of Spanish lenders' loan quality and the prospects for home loans are puzzling. Spain has $792 billion of home loans on lenders' books. The current default rate is only 3%, despite a national unemployment rate of 23%. Contrast that with the U.S. and Ireland. In the U.S., delinquent mortgages are 7.6% of total mortgages versus an 8.2% U.S. unemployment rate. In Ireland, the delinquency rate is 9.2% versus a 14.3 unemployment rate.
These comparisons make the reported numbers in Spain highly suspect. I don't think we've heard the last of problems in Spain--and by extension, Europe.
Steve Lehman
LehmanInvest.blogspot.com/
The condition of Spanish lenders' loan quality and the prospects for home loans are puzzling. Spain has $792 billion of home loans on lenders' books. The current default rate is only 3%, despite a national unemployment rate of 23%. Contrast that with the U.S. and Ireland. In the U.S., delinquent mortgages are 7.6% of total mortgages versus an 8.2% U.S. unemployment rate. In Ireland, the delinquency rate is 9.2% versus a 14.3 unemployment rate.
These comparisons make the reported numbers in Spain highly suspect. I don't think we've heard the last of problems in Spain--and by extension, Europe.
Steve Lehman
LehmanInvest.blogspot.com/
Thursday, April 26, 2012
Amazon: Growth in the Business, But Where Are the Profits?
After today's close of trading, Amazon reported that its revenues and earnings per share in the latest three-month period exceeded the estimates of Wall Street analysts. In after-market trading, the stock price jumped 15%.
Amazon continues to grow and invest in its business, as it has throughout its history. But the company's operating profit margin was only 1.8%, the lowest since 2001. Earnings per share this year are only half the level of two years ago, and estimated earnings per share for 2012 have steadily declined from more than $5 two years ago to the current estimate of less than $2.
With the stock selling for about 150 times estimated earnings for 2012, I would avoid the shares and look instead for companies that are actually increasing their earnings at a rapid clip with valuations that are a fraction of Amazon's.
Steve Lehman
LehmanInvest.blogspot.com/
Amazon continues to grow and invest in its business, as it has throughout its history. But the company's operating profit margin was only 1.8%, the lowest since 2001. Earnings per share this year are only half the level of two years ago, and estimated earnings per share for 2012 have steadily declined from more than $5 two years ago to the current estimate of less than $2.
With the stock selling for about 150 times estimated earnings for 2012, I would avoid the shares and look instead for companies that are actually increasing their earnings at a rapid clip with valuations that are a fraction of Amazon's.
Steve Lehman
LehmanInvest.blogspot.com/
Tuesday, April 24, 2012
Apple (cont.)
Today's stock market focus will be on Apple's earnings after the close of trading. I previously considered the hype surrounding the company and its stock (3/30 blog). Today I consider the case for investing in the stock or in buying or selling call or put options on the stock.
I don't know what I missed, but people have been in awe of the company's financial prowess, as it declared its intention to pay a dividend in response to a torrent of cash generated by the company's unique products. Cash of $30 billion is substantial, but its total stock market capitalization ($524 billion) is one of the highest ever. So cash as a percent of stock market capitalization is only 5%. As for the torrent of cash generated, I am unimpressed. After assuming the payment of a substantial dividend (as I do when looking at any stock), in the last fiscal year the company generated virtually no free cash flow. In the current fiscal year, I calculate a 7% free cash flow yield (free cash flow divided by the stock market capitalization). There are many companies with stronger balance sheets and higher free cash flow yields.
On an earnings basis, the stock sells for 12.7 times current fiscal year earnings estimates. For a company of its quality, that is attractive. But already 44 analysts rate the stock as a "buy," 9 are "neutral," and only one a "sell." Earnings estimates for this fiscal year have increased about 30% in recent months, so expectations are quite high.
I would consider selling put options on the stock at lower prices. If the stock rises, I would keep the proceeds from selling the puts. If the stock falls sharply and I am forced to buy the stock, I would buy the stock (a great company) at a much lower price than the price today. That, I think, is the appropriate approach for this company and its stock.
Steve Lehman
LehmanInvest.blogspot.com/
Apple: 562
I don't know what I missed, but people have been in awe of the company's financial prowess, as it declared its intention to pay a dividend in response to a torrent of cash generated by the company's unique products. Cash of $30 billion is substantial, but its total stock market capitalization ($524 billion) is one of the highest ever. So cash as a percent of stock market capitalization is only 5%. As for the torrent of cash generated, I am unimpressed. After assuming the payment of a substantial dividend (as I do when looking at any stock), in the last fiscal year the company generated virtually no free cash flow. In the current fiscal year, I calculate a 7% free cash flow yield (free cash flow divided by the stock market capitalization). There are many companies with stronger balance sheets and higher free cash flow yields.
On an earnings basis, the stock sells for 12.7 times current fiscal year earnings estimates. For a company of its quality, that is attractive. But already 44 analysts rate the stock as a "buy," 9 are "neutral," and only one a "sell." Earnings estimates for this fiscal year have increased about 30% in recent months, so expectations are quite high.
I would consider selling put options on the stock at lower prices. If the stock rises, I would keep the proceeds from selling the puts. If the stock falls sharply and I am forced to buy the stock, I would buy the stock (a great company) at a much lower price than the price today. That, I think, is the appropriate approach for this company and its stock.
Steve Lehman
LehmanInvest.blogspot.com/
Apple: 562
Monday, April 23, 2012
A Look at Conventional Wisdom
In this week's cover story, Barron's released the results of the Spring, 2012 "Big Money Poll," its semi-annual survey of U.S. money managers. It reveals what the conventional wisdom thinks about the economy and various financial and commodity markets around the world.
Given the prominence that the magazine gives to this survey, one would think that it gives a fair representation of the views of professional investors in the U.S. But the survey is based on the responses of only 125 money managers. Since a number of the respondents are at small firms, the survey doesn't reflect what the real "big money" thinks about markets.
I still find it interesting from a contrarian perspective to see what at least part of the conventional wisdom sees. The poll showed four times as many who are bullish than who are bearish over the next year. A substantial majority (84%) expects to be a net buyer of equities over the next 6-12 months, and 73% expect equities to be the best-performing asset class. This is despite a lack of optimism about corporate earnings, as 49% expect analysts to lower their estimates for 2012. Both expectations are not likely to be right.
A large majority (81%) is bearish about U.S. Treasuries (only 2% are bullish). Only 14% are bearish about the U.S. Dollar, and 84% expect the dollar to rise against the Euro, even though 77% expect the European Union to survive.
These views are not surprising. While going against the conventional wisdom is not a guarantee for investment success, it at least is important to think critically about the likelihood that widespread views are already well reflected in asset prices. Given that, unexpected outcomes could have a major adverse impact on those asset markets.
Steve Lehman
LehmanInvest.blogspot.com/
Given the prominence that the magazine gives to this survey, one would think that it gives a fair representation of the views of professional investors in the U.S. But the survey is based on the responses of only 125 money managers. Since a number of the respondents are at small firms, the survey doesn't reflect what the real "big money" thinks about markets.
I still find it interesting from a contrarian perspective to see what at least part of the conventional wisdom sees. The poll showed four times as many who are bullish than who are bearish over the next year. A substantial majority (84%) expects to be a net buyer of equities over the next 6-12 months, and 73% expect equities to be the best-performing asset class. This is despite a lack of optimism about corporate earnings, as 49% expect analysts to lower their estimates for 2012. Both expectations are not likely to be right.
A large majority (81%) is bearish about U.S. Treasuries (only 2% are bullish). Only 14% are bearish about the U.S. Dollar, and 84% expect the dollar to rise against the Euro, even though 77% expect the European Union to survive.
These views are not surprising. While going against the conventional wisdom is not a guarantee for investment success, it at least is important to think critically about the likelihood that widespread views are already well reflected in asset prices. Given that, unexpected outcomes could have a major adverse impact on those asset markets.
Steve Lehman
LehmanInvest.blogspot.com/
Wednesday, April 18, 2012
Sell in May and Go Away This Year?
One of the oldest adages on Wall Street is, "Sell in May and Go Away." This is because of the overwhelming performance differential over the decades during the October to April periods compared to the May to September periods. If one had the means, it often would have been worth it to cash out of the stock market on April 30 (and go on a long vacation?) and come back on September 30.
This is due in part for two reasons. One, the biggest stock market declines have occurred in September, and two, the October to May period has seven months in which to earn returns, versus the five months from May to September. It is a bit surprising, though, that October is included in the strong periods, since some of the biggest declines in history have occurred in October.
With stocks off to an exceptionally strong start this year, more than a normal year's worth of gains have already occurred. Particularly with the widespread optimism reflected in sentiment surveys until last week's modest market correction, some caution is appropriate.
I always like to have some cash available for unanticipated opportunities, and with the 25-30% rebound in stock prices over the prior six months, greater selectivity in making new purchases is appropriate.
Steve Lehman
LehmanInvest.blogspot.com/
S & P 500: 1385
This is due in part for two reasons. One, the biggest stock market declines have occurred in September, and two, the October to May period has seven months in which to earn returns, versus the five months from May to September. It is a bit surprising, though, that October is included in the strong periods, since some of the biggest declines in history have occurred in October.
With stocks off to an exceptionally strong start this year, more than a normal year's worth of gains have already occurred. Particularly with the widespread optimism reflected in sentiment surveys until last week's modest market correction, some caution is appropriate.
I always like to have some cash available for unanticipated opportunities, and with the 25-30% rebound in stock prices over the prior six months, greater selectivity in making new purchases is appropriate.
Steve Lehman
LehmanInvest.blogspot.com/
S & P 500: 1385
Tuesday, April 17, 2012
Stocks Had Become Oversold
By last week, U.S. stocks had become oversold as sentiment measures retreated from the high levels that had accompanied the strong first quarter. I'd recommended taking profits and raising cash to above-normal levels. For those inclined to short the market, that tactic does not currently offer sufficient odds for success.
I currently find few values among well-established companies. Instead, there are several deep-value, high-dividend yield, and small-capitalization stocks that offer an attractive return/risk tradeoff for those with patience.
Overall, this is not a propitious time for taking large positions. Maintaining above-normal cash levels--but not shorting--still makes sense.
Steve Lehman
LehmanInvest.blogspot.com/
S & P 500: 1370
I currently find few values among well-established companies. Instead, there are several deep-value, high-dividend yield, and small-capitalization stocks that offer an attractive return/risk tradeoff for those with patience.
Overall, this is not a propitious time for taking large positions. Maintaining above-normal cash levels--but not shorting--still makes sense.
Steve Lehman
LehmanInvest.blogspot.com/
S & P 500: 1370
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