Tuesday, August 21, 2012

Buy - Hold - Sell

CUT 1: The last few days the most valuable company in the world got even wealthier. Right now Apple's estimated market capitalisation is close to $630B. In absolute numbers and not counting for inflation only Microsoft during Gates's reign (1999) was able to boast a value that close ($619B). But history of record breaking obviously ignores inflation and rationalisations, and Apple has de-facto become the company, which now holds the record of being most valuable in the History of Mankind.
Financial channels like CNBC and Bloomberg's keep interviewing AAPL's analysts about its next stock move, that is, is it gonna still go up, stay put, or roller-coaster downhill? Although you hear all sorts of opinions, at least as many as those analysts sharing them, there is a figure, a ratio actually, that everybody seems to respect. This is the P/E ratio. P/E seems to be like the holy grail to all investors, traders and pigs that get slaughtered alike. It's also called 'multiples', meaning how many times (multiples of) the annual earnings per share (EPS) equals the current trading value of the stock (one share).
If you select any given industry, and calculate the respective P/E for many of its members, and then average it, you get that industry's average P/E. Apple's P/E these days is less than 16. This is quite a reasonable number and very close to the technology industry's average. What does this mean then? Well, analysts, who explain their point of view about companies they closely follow, after they provide their deep thoughts and arguments that range from a company's fundamentals (product launches, revenue growth, profit margin, market penetration, brand value, etc) to its stock behaviour technicals (moving averages, and scores of ratios to blow out your brains... kinda like driving forward by looking at the rear mirror, etc), they then almost never omit mentioning, "well, on a second thought, its multiples are still on the low side, in other words, the stock is still cheap!".
To grasp the meaning of this, consider Amazon compared to Apple: If Apple had multiples anything close to Amazon's (almost 300) would be worth a cool 12 trillion dollars today! If you considered Facebook with a multiple of 110, that's 7 times Apple's multiple, that is to say, if investors and traders valued Apple as much as they 'seem' to (hype) be valuing Facebook, would bring Apple to a market cap of 4 trillion dollars and change! Or its share at a value of $4.2K a pop! Does it sound astronomic ??? Is it too much? Buffet wouldn't think so, I reckon, with his BRK-A's shares trading at an equally cool $128K a piece as we speak...
Now let me ask you something: Is it reasonable to 'reason' like this? Apparently some people do. Although, be careful, it seems that in real life, even if the P/E was proven a reliable measure for many companies on average, it is prudent to assume that there are limits in what the investment and trading community will emotionally accept as a total cap figure for any given company at a well specific moment in time. I don't believe anyone is ready yet today, for any public company on Planet Earth, to touch a trillion dollars in market cap, any day soon. I don't know what it is, but a trillion dollars sounds like a shedload of money. It can raise the dead!

CUT 2: Adam Johnson is a smart kid and a Bloomberg 'analyst', 'interviewer', 'strategist', you name it. He always looks well brushed and gorgeous to watch. Bloomberg seems to be paying a lot of attention to the looks of their TV presentators (with some exceptions, of course). Back to Adam though, I don't know how much of the analysis he shows on those humongous surface computing screens, literally out of the 'Minority Report', but his stuff is for sure cool, most of the time. If it's his thinking, then well done, Adam! Namaste.
Well, yesterday Adam said something quite interesting. I will only make some comments here just to demonstrate the type of thinking (albeit simple and straightforward one would argue) that goes thru the mind of the so-called financial strategists, who, like modern day Delphi oracles, do their best to predict the future, and conclude the inevitable (the only conclusion an investor or a trader is really looking for) sell, hold, buy!
Well, Adam referred to the Financial Industry in his analysis. He mentioned other industries as well, but his focus yesterday was upon Banks and Insurance companies. He simply said that right now more than 90 percent of all the financial sector companies are trading above their 200-day moving average. That's too much! Way too much, he implied.
The 200 day moving average is a popular measure among technical analysts, especially when current share values cross above or fall below that average. It is actually the average value that you obtain if you take a stock's closing price for the last 200 trading days from today. In other words, it tells you at what average price during the last 200 trading days investors 'valued' a company's stock. (Note: to identify potential stock movement trends, technical analysts also like to plot the 50 day MA on top of the 200 day as well. If the 50-day MA happens to cross below the 200 day it'd suggest a downward trend for the stock. That's because investors seem to be (wanting to) pa(y)ing in the last 50 days less than what they (were prepared to) pa(y)id during the longer period of 200 days. Like it or not, that's how technical analysts reason).
So Adam said that so many Financials trading above their 200 day MA is not 'good' news. That was far too good to be true. Regardless what other sectors were doing, this couldn't be kosher. So, Adam asked his assistants to go look for similar moments in the past, where the percentage of financial companies trading above their 200 day MA appeared similar to the present. Especially since the banking industry didn't yet seem to have crawled out of the woodwork. Adam reasoned by the simple premise that what goes up must eventually come down. The golden rule of trading, that is...
Not surprisingly, Adam proved his thesis to be reasonable. Touching gently his fancy transparent surface computer screen, he showed us four similar periods in the past of likewise behaviour, and he conspicuously circled the tops of those trends in his periodical curve. We seem to be at one of these very tops right now, as we speak, he said. This is quite interesting! Given he has been talking about percentages there was an upper limit to where those peaks could possibly go. That is 100, right? Well, he sez, what happen(ed)s next? Not surprisingly, what goes up must eventually come down to keep the wave flowing. That's the name of the game, right?! Then, out of 'nowhere', he carried forward and superposed upon his displayed curve (showing the pct of financials above the 200 day MA), a new different graph. That of the S&P 500 index over the same period of time. Surprise surprise! Right after the banks reached their 200 day MA related peaks the S&P seemed to have plunged into the deep south. QED! And this happened for the last 4 times, Adam said! Why not now, then? And he said that staring thru the camera with his cute Hollywood soap star looks that would practically melt down the vast majority of US teenage girls and alike. He was in fact saying... kiddos, if you hold financials, off-load them or brace for a free fall. Or do hedge some, or short sell, or anything at all. Pleeeease!
The question now is, is he gonna be proven right? Or not? Stand-by... Gonna be fun, as always.

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