All things considered yesterday was not too bad of a day with Apple (AAPL) dragging down the techs and general market. Take that bit of negative news out and the market was strong. The employment numbers continue to improve, but it is a task of patience for investors as it seems that it is a slow turnaround based on baby steps. We are not naïve enough to believe that we will be growing by leaps and bounds any time soon, but the fact of the matter is that the unemployment rate will need to drop further for any prolonged rally to take place in the stock market and for the economy to continue its slow growth (the larger the drop of course the higher the growth).
Chart of the Day
Chart courtesy of forbes.com
This data is a bit stale, but still good to display the true issue in Europe. Spain reported unemployment at 26% yesterday however those truly impacted by the poor economy are actually the future and the story is the same across the continent - note that the youths in the financially troubled countries are impacted the most. This says a lot about the labor laws in the EU and forces one to worry about their future as a continent with the next generation getting a late start. This may not lead to the next "Dark Ages" but might very well lead to something we will call the "Dim Ages".
We have economic news due out today, and it is as follows (these are the consensus estimates):
New Home Sales (10:00 AM EST): 385k
Asian markets finished mixed today:
All Ordinaries - up 0.52%
Shanghai Composite - down 0.49%
Nikkei 225 - up 2.88%
NZSE 50 - up 0.24%
Seoul Composite - down 0.91%
In Europe markets are mostly higher this morning:
CAC 40 - up 0.64%
DAX - up 0.96%
FTSE 100 - up 0.11%
OSE - down 0.06%
This morning we want to discuss the idea of perception and how it has the ability to influence stock prices and the multiple investors attach to stocks. It is something which we have watched over the years which has always amazed us due to the high correlation between the stock price and perception as it pertains to a company's ability to operate unmatched in an industry or continue growing at a rate above market averages, etc. So are we surprised that Apple has seen its share price pummeled over the past few days? Yes and no. No because we have seen the perception that Apple is an untouchable tech innovator a couple of generations of technology ahead of everyone else and has a brand which will continue to gain followers and maintain sky-high margins. Yes, we are surprised though due to the fact that even though the growth rate may be slowing and the company's projections are more in line with actual operations and their previously perceived insurmountable lead in the tech space has been and continues to be whittled away their margins are still the highest in the industry and the company sports growth rates which most of their competitors would die for.
So can Apple recover? Yes. Look no further than Netflix (NFLX) which had seen its shares fall on poor management decisions and lackluster results over a period of time. Yesterday the stock rose $43.60 (42.22%) to close at $146.86/share after the company showed strong subscriber growth displaying that the idea that their brand was tarnished was incorrect and most likely an overcrowded trade. We recognize that a good portion of yesterday's bounce was due to a short-squeeze but we also believe that the perception that Netflix is a damaged company with an incompetent CEO and lacking the ability to execute its business plan as it transitions to streaming from the mail order business was in large part eliminated after the quarterly report and thus opened the gates for positive ideas and capital inflow to push shares higher.
Who else could be impacted by this change in perception you ask? Look no further than Amazon (AMZN) which has for far too long been able to have investors buy into their business plan which continues to expand and broader to essentially a Web/IT conglomerate. The revenue growth is high and strong as the company continues to expand into new segments however if one were to think of Amazon as a retailer and these new lines of business as new brands of stores then the perception of the company begins to change. Its growth on its old businesses are low compared to their new services (which is not unnatural) but one just must question investors' willingness to ignore the need to value the separate lines of business at different values.
If one looks at it another way however, it is easy to see a connection to how investors looked at Apple. Every time the business begins to stall out on revenue growth Jeff Bezos is able to create a new business line for the company to continue its growth and continue to sell that growth story to investors. The only difference between Apple and Amazon is that in valuation terms Apple could not fall very far before value was apparent. When investors' perception of Amazon's prowess deteriorates like it did at Apple, those shares will have much further to fall as the earnings are not there to back it up and margins are razor thin leaving little room for error.
Moving on to other news, Cirrus Logic (CRUS) saw shares fall $3.24 (10.82%) after the news from Apple on the past quarter disappointed the market and trading here too was high as investors took down the whole Apple ecosystem. The company itself reported strong results, but provided guidance which analysts viewed as a bit weaker than anticipated with little chance for a surprise. The conference call transcript is available here for those interested. We believe this is one of the names which anyone interested in tech, and more specifically Apple, should follow.
Clearwire (CLWR) shares rose $0.09 (2.80%) yesterday to close at $3.30/share after the company was discovered to be helping Google with an experimental network that will be tested at Google's (GOOG) headquarters. Clearwire declined to comment, but the news was covered by outlets such as the Wall Street Journal (see link here) and when one looks as the facts of the matter it seems quite logical of why Google would be in the market to develop products for use on this spectrum as well as potentially roll out a network to overlap with their experimental fiber project currently being tested in Kansas City. This will most certainly add another level on intrigue to the ongoing negotiations for Clearwire, especially due to the fact that Dish (DISH) is the other bidder - they held talks with Google previously on the possibility of using spectrum to build a network together.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.