|by Wes George
AAPL Is A Growth Stock Wearing A Value PE
April 3rd, 2000
After last week's beating, the tech stocks may limp off their recent lows in anticipation of a robust earnings season. Nevertheless, something seismic has shifted in the psychology of investors, both institutional and retail.
It's as if everyone woke up last Tuesday and smelled the coffee at the same time. Certainly, the gurus who heralded this decade long rally, Abbey Joseph Cohen and Mark Mobius, gave investors pause by suggesting technology stocks were overvalued.
But it's the biotech stocks that set off the early warning alarm. Like a parakeet in a coal mine, highly speculative stocks with novel business models make good proxies for the level of fear/greed in the air. Check out the daily graph of Protein Design Labs (PDLI) or Biogen (BGEN), it looks like a tsunami has come and gone. A month ago, the biotech stocks were just the latest fashion of idle speculation to storm the Nasdaq, but now they are the first wave to crash really hard, in the classical sense, a la history books. And that's truly scary, because until now, investors could imagine that history has little bearing on the so-called New Economy. The biotechs have proven that today's electronic equity markets share at least one fundamental flaw with every other stock market since the beginning of capitalism-- human folly.
Take, for example, Protein Design Labs Inc., a franchise with fantastic promise. Its stock doubled in 21 days during January. People began to pile in not because they believed this stock would someday produce the earnings to justify the price, but because they believed that they could sell the stock at a higher price tomorrow. It's this "greater fool theory" that drives momentum stocks beyond reasonable prices and it can be a very lucrative game for the skilled gambler. But, as Yale economics professor Robert Shiller said on CNBC, it's the "sick" way for a company to grow it's market cap.
On February 16th the shares of Protein Design Labs soared from 134 to 204 dollars, then in the next eleven days climbed to a high of 329 bucks. The way back down was just as fast but a lot more painful for the last suckers to take a position. Now PDLI is hovering at about 79 dollars a share, "the devil took the hindmost" speculators. One could argue that PDLI is under valued today based on its incredible potential to revolutionize antibody discovery and production. Yet there won't be a bounce back to new highs for this company, because the party is over. The momentum traders have moved on and the pall of a recent bloodbath hangs over the stock as a darkly ominous warning for shareholders of any company with a P/E ratio above 150.
There are other signs of a top building for the technology stocks.
The initial public offerings last week went poorly. Can you believe it? People didn't mindlessly rush to buy inane dot coms concepts freshly baked from some venture capitalist's oven. The CBOE put/call ratio is whacked out to a near record high degree of optimism, a strong contrarian sign that a storm of selling is bearing down on the Nasdaq. The news is full of stories about dot coms running out of start-up capital with no earnings landfall in sight. Aye, matey, like a thousand wannabe Cristobol Colons racing for the New World, the dot coms languish in an earnings doldrums, a Sargasso sea of doubt, the treasures of Asia may not be what they seem!
There are good technical reasons that the Nasdaq looks weak too, but I won't delve into them in great detail. Suffice it to say that since last Thursday's low busted through the low set on March 15th, the weak buy signal that Friday's bottom gave is rated only head fake status. The Nasdaq may bounce a bit on Monday, use it as a chance to get out of your high risk positions and batten down the hatches, cause this ship is going down, down, down into that burning ring o' fire.
What does all this BS mean to Apple investors?
It's all about earnings. Growing earnings is the only real way to reconcile soaring stock prices with high P/E ratios. The other way is to collapse the stock price. One way or another the market will search for equilibrium.
Apple has a comfortably conservative P/E ratio of 35 and will surprise Wall Street with stronger than expected earnings on April 19th. That's doubly bullish for AAPL, considering the new realization among investors that tech stocks are, in general, over valued.
Apple is priced like a safe haven in a sea of tech volatility. I've been saying this for months now, and I'll say it again. Apple is that rare breed of technology growth stock with serious value, a god send for nervous investors who want the growth of technology but can no longer stomach the astronomical P/E ratios of the sector's highest flyers.
So suddenly, AAPL looks more attractive than ever as high tech investors become born again fundamentalists in the weeks ahead. The earnings-less stocks that pay only dividends of promise are going to shed momentum players as the greater fools become scarce. Companies with strong earnings growth, like Apple, will be rewarded accordingly. Hallelujah! There is a rational market after all! Praise the Lord!
Hey, I am NOT a bear!
On March 15th I was hyperventilating over the dire prospect of a major Nasdaq correction. Now it looks like we are closer than ever to the precipice. But I am no bear. The over all secular bull market trend line is nowhere near breaking. Long term investors should just close their eyes to the coming healthy mopping up of the over-leveraged. Those with shorter horizons might want to consider defensive measures.
The evolution of technology will continue to rain productivity improvements and unforeseen innovation down upon the world economy insuring unprecedented growth--and change--as far as the mind can envision beyond the horizon. Whether this is a good thing or not is for the philosophers among us to decide. However, it practically guarantees the rally of the century will continue, but the chart valleys at this height could be very deep and scary.
Your comments are welcomed.
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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!
Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.