Archive for October, 2011
Buy or Sell: IBM Reports Earnings Monday
Written by Jared Levy, Editor, Options Strategy Weekly
IBM (IBM:NYSE) is one of the few tech companies that have been able to reinvent themselves. With the fast-paced evolution of technology, many of its early peers are long gone.
IBM has a history of strong earnings growth, and the stock has been on a tear over the past year — gaining almost 28%. The question now is whether its earnings will support its lofty stock price.
My earnings thesis uses several points of analysis so that I can fine-tune my estimates. There is no absolute when it comes to how the markets will respond to an earnings report, but with a checklist, logic and a little experience, you can substantially stack the odds in your favor.
Graphing Growth
Comparing data visually is extremely helpful when you need to put things in perspective. The first data I analyze is price-to-earnings and revenue growth. The chart below tells us several things:
- IBM is at a relative price-to-earnings (P/E) multiple high point over the past two years (solid yellow line) — this brings risk of a pullback.
- IBM tends to generate its most revenue in the last quarter of the year, so the big expectations are going to come at the next report; this quarter may not be as heavily weighted.
Chart Courtesy of Bloomberg
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The average analyst is looking for IBM to earn $3.22 this quarter, which should knock down the P/E multiple to 13.37 with IBM at $186.80. Out of those analysts, 16 of them rate IBM as a buy and 14 have it as a hold, with zero sell ratings.
The problem I see here is that the target price is about Read more
Use Earnings Season to Play the S&P 500
Written by Jared A Levy, Editor, Options Strategies Weekly
It is a big week, with lots of stocks in play. Alcoa (AA:NYSE), JPMorgan (JPM:NYSE) and Google (GOOG:NASDAQ) are just a few of the companies that will kick off earnings season this week.
To the average investor, earnings may seem like the same march of financial reports that happens each quarter. But for the select few who can get ahead of Wall Street’s expectations and understand exactly what to look for, it is a time to profit.
Think about it like this…
The stock market is the ultimate leading indicator of corporate and economic health. Investors buy and sell stocks based on emotions, economic data, news and chart patterns. These movements are confirmed by the strength (or weakness) of earnings reports. It’s sort of like a race with checkpoints along the way.
Believe it or not, the S&P 500 is in a position now that might surprise you.
Stocks on Sale
There is no doubt that my colleagues and I have cast a fairly bearish tone over the equity markets for the past several months. Fortunately, our thesis has played out profitably. But it is time to consider a change, if only for a short while.
I know you may think I’m crazy, especially given the shakiness of Europe and the overall negative economic data emerging from the U.S. But there is a reason…
I found some interesting and compelling indicators, the first of which you can see in the chart below.
Weekly P/E Chart of the S&P 500 — Courtesy of Bloomberg
View larger chart
This chart tracks the total price, earnings and estimates of all the stocks in the S&P 500 (SPX) over the past 12 years. The white price line is often a motivator for investors, but this time it means very little.
Price is relative. Remember price is just a dollar amount — value is determined in other ways.
Amateurs might look at today’s S&P 500 and think that because the S&P 500 is at April 2009 levels it is a reason to buy. Of course if you were to look back, investors may have said the same thing in October 2008, when the S&P was trading at levels not seen since 2004.
We all know that buying in October 2008 was NOT a good decision. So why are things different now?
I want you to focus your attention on the red and green lines. Try not to get dizzy.
These lines represent the expected price-to-earnings ratio and the trailing or realized P/E ratio respectively. They have been dropping along with prices.
The P/E ratio is the most popular measurement of value for a stock. Generally speaking, it’s good to buy when P/E ratios are relatively low and sell when they are high. It’s not the end all be all, but I have more data that may quiet the P/E naysayers.
Over the past 12 years of data shown on this chart, you can see that the ONLY time the S&P 500 even came close to its current P/E level (green) was in the crisis of 2009 and it was only about two points lower. The expected P/E is also in a favorable buying range.
The average P/E multiple for the S&P 500 over this time frame is about 19; a reading of 12 means value. As long as companies can at least meet their Read more
The American Nightmare
Wall Street protestors aren’t just calling for change, they are “Taking It to the Streets.” An army of hundreds has quickly mushroomed into thousands with union reinforcements on the way. The list seems nearly endless with groups as diverse as the Transit Workers Union to the Chinatown Tenants Union joining forces with political activists like MoveOn.org to send Wall Street a message.
Masters of the Universe had better listen because this voice isn’t going away anytime soon. Frustrated with no jobs, decimated pensions and headlines of CEOs being rewarded for failure, the protestors are demanding action.
Many are starting to ask if this is America’s version of Arab Spring. Armed with the same tools that launched a revolution in the Middle East, protestors are able to quickly get their message out on social media sites like Facebook and Twitter. Similar protests are currently planned for as many as 50 cities throughout the U.S.
The protestors are convinced the system is broken and needs to be overhauled. While they have been unable to articulate their real concerns or offer any concrete solutions one thing is certain. THEY ARE RIGHT!
The system IS broken and it is time for us to take the necessary steps to restore our credibility.
If one is looking for ground zero in this epic battle you need to look no further than the board of directors. With a mandate to protect shareholders it is clear that their first loyalty is to the executive suite.
Let’s take a look at the life of a CEO. When first hired by the board there is excitement around the potential of the new chief executive to drive shareholder returns. Negotiated up front is a severance package for the CEO in case he is let go or the company is acquired. Usually given a mandate, the CEO takes the helm and the corporate ship sets sail.
It is understandable that chief executives should want to be paid large sums of money when they succeed, but must we reward failure?
Leo Apotheker was fired from Hewlett-Packard (HPQ:NYSE) and given a $13 million severance package. Add that to the $10 million he received for signing, he made a cool $23 million for 11 months work while the company burned, causing billions of dollars in losses for shareholders. I doubt any of the unemployed protestors received anything more than two weeks’ severance if they were lucky.
Weapons of Mass Destruction
Stock option compensation has become a Read more
AAPL: Buy Ahead of Tuesday’s Announcement?
- Published on Monday, 03 October 2011 15:54
- Written by Jared Levy, Editor, Options Strategies Weekly
I’m not here to tell you whether Apple is a good or bad company. That’s not going to make you money. As a trader, it’s my job to figure out how the masses will act when there is an event such as earnings reports or a product launch.
It’s the ability to understand and calculate the crowd’s mentality that separates an analyst from a successful trader or investor.
I would be lying if I said it was an easy task.
For Apple (AAPL:NASDAQ), the stakes and expectations are high. Even though Apple tends to downplay future expectations, it is an industry leader that must deliver big. The new iPhone launch tomorrow could be a big one for Apple’s stock in the near term, so be prepared.
Does Apple Still Have the Edge on Competition?
The iPhone, which has been out for almost five years now, has a few more adversaries to confront and conquer, and they are serious contenders.
Don’t get me wrong; the iPhone is an awesome product that was a trendsetter in form and function, but iPhone’s innovative design is now the norm and is losing uniqueness and sex appeal. There are several things we have to think about before buying one share of Apple ahead of Tuesday’s (alleged) unveiling of the next generation of its flagship product.
First off, the iPhone accounts for about 53% of Apple’s revenue. That’s a lot riding on one product that is highly scrutinized. It is a huge seller and always exceeds sales expectations, but by how much and for how long?
As cool as the device may be and as innovative as Apple is, the iPhone is being copied and improved upon every single day. The original iPhone was a game changer, but now it’s showing a bit of age and losing its place as the cool, must-have smartphone.
Google, HTC, Samsung, Microsoft and others are doing everything they can to steal the iPhone’s thunder: 3-D phones that have faster processors, more memory, and increased flexibility and functionality are creeping into the iPhone’s market share.
But the secret may not be all Read more