Search This Blog

Saturday, March 19, 2011

Market Thought... don't listen, think

Yesterday I saw an article from Cramer titled "Tech is Not Done Going Down". A few hours later, I saw another article by him titled "I am Not the Reason Tech is Down".  I laughed when I saw this cause you know his readers were beating him up over it so much so he felt the need to publicly justify the first article.  If Cramer liked AAPL at 350 he should love it at 330, but instead an article written with an extreme general tone is suggesting not to.  That annoys people.

Prior to Japan, we were seeing seasonality play out.  The SP500 started to flat-line in February, and the most of the momentum players (like LLNW, FNSR, AKAM, ARMH, CREE to name a few) were declining or losing mojo.

Sometimes seasonal market trends play a role, sometimes they do not.  However, for the current market action, there is no secret as to why the market started going down.  Once the Japanese situation became a real, threat of category 7, nuclear melt down the market started collapsing.  This is not seasonal, this is very real event driven action.

With this action, uncertainty levels rose to levels that were not reflective to the systemic risks to the system.  This allowed solid names to decline further than they should.

Anyone can see the obvious technical destruction that took place.  This is giving all the big-boys, including Cramer, pause. (The 10yr yield has also come down some, and since it suggest GDP growth, this is giving the more sophisticated players a cautionary tone.)

These hick-ups in macro-economic indicators cause inefficiencies in micro-activity (ie stocks).  Stocks are valued on profits.  If we are to take a step back, and simply think, we can see the inefficiency or opportunity.

AAPL and IBM are examples. (There is a reason why I like them, and have liked them.)

The last 4 quarters AAPL had earnings of: 6.43, 4.64, 3.51 and 3.33.  The trailing PE is 18.43. (Current trailing PE is at a discount to it traditional 19-22 trailing PE.)  Next quarter, the 3.33eps will be replaced with the March 2011 earnings, where estimates are 5.29.

If AAPL stays around 330, and earnings in a few weeks, they will have a trailing PE of 16.6. (Trailing earnings will be 5.29, 6.43, 4.64 and 3.51.) Does that seem reasonable?

Lets look ahead two quarters. In June, Apple is currently projected to earn 5.26eps. (Trailing earnings becomes 5.26, 5.29, 6.43 and 4.64) The PE at 330 becomes 15.26.  Does that seem reasonable given the demand of the products and ecosystem?

The same can be said for IBM. The current trailing earnings are 4.18, 2.82, 2.61 and 1.97. In the next few weeks they will report, and are projected to have 2.30eps.  In June, estimate is 3.01eps.  With a 13.5 PE, the stock should be trading between 160-167. (Assuming the PE stays at 13.5, but I think the growth numbers merit a higher PE.  Historically, around 14-16 was seen. I think 14-15 is very reasonable.)

The technical trends for both IBM and AAPL are still in tact.

No comments:

Post a Comment