Stocks on My Watchlist: Apple, Google, Cardinal Health

The market is deciding which way to go. The Dow could be retracing but the S&P isn't confirming. At the end of the week, here are the stocks that I have on my watch list.

This list grew from 18 companies to 22 companies. The market action is telling me something. On the bright side, it could be a great time to accumulate.

One of my favorite on the list this week is Automatic Data Processing (ADP). The stock is now within 10% above the low. I'll follow up with a research later in the week.

I'd like to check up on some stocks I considered to be mainstream. Some may consider them leading indicators to the consumer. The first company is Apple (AAPL). It is not news that Apple is one of the most innovative companies with great product lines. The stock is trading at 25x P/E and earned $5.56 over the past twelve months. The chart below shows the technical trading of Apple. This is a weekly chart going back three years.

The stock hit an all-time high during the Christmas shopping season in 2007. Since then, it is making a lower highs and lower lows. At $140, it is 30% below the high saw in 2007. Despite all the talk of bull market, the consumer is deleveraging. The red line trading band is showing a long-term down trend.

Fundamentally, the company appears to be priced for perfection and trading at fair value of $140. Gross margin sits at 35%, a ten year high. How much more can Apple expand their margin is the next question investors must ask.

My next stock is Google (GOOG). I'll use Google as a proxy for corporations spending on advertising. Trading at 30x is by no mean "cheap". With EPS of $13.68, no dividend, I have to wonder where all these money is going. With crazy cash on hand ($17.8 billion) and no debt, the stock demands a premium. Microsoft (MSFT), Google's competitor, also has no debt and $23 billion in cash. It is trading at half the price of 13x. Amazing value if you ask me.

In addition, they also pay a nice 2% yield. Let's forget about Microsoft and focus on Google. I consider them to be one of the leading indicator for where out economy is going so let's take a look at what the chart is discounting.

This is a weekly chart going back three years.

I drew a Fibonacci retracement and analyze how strong this rally is. From the peak to trough, the stock rallied back to the 38% line or $440. The 50% line or $494, is consider the tipping point for technical analysis.

Coincidentally, Morningstar has Google fair value at $500 (based on research note on 4/17/09). If Google can rally pass 50% line, technically analysis suggests it is poised to rally up to its previous high of $723.

This chart shows Google trading in a similar pattern to Apple. It is a long-term downward trend. Because both stocks demand premium, I do not like it at this price.

Let's take a look at the stock that I do own, Cardinal Health (CAH). Fundamentally, the stock is trading at deep discount of 8x. Its debt level of $3.7 billion isn't good. Their cash level of $1.4 billion isn't going to cover it. The good thing is only $1.4 billion is due in five years. Because of that, it deserves this multiple. The chart tells a different story.

A three year weekly chart tells a different story. After reaching $74 in 2007, the stock hit a low of $29. 50% retracement is $51.7, Morningstar fair value is $52. More important than anything, the stock appears to stop going down. Every time it fell to $27 range, buyers stepped in and purchase. Below is a daily, one year chart.

The blue trading range is what attracts me to the stock besides the discounted price. Both long-term and intermediate-term is telling me to get bullish.

One again, the market is turning bearish. I be award of adding to the market right now. If you invest in mutual funds or ETFs, be aware of your investment.

Comments

[archangelms:]

I find it amazing that google which trades at a lower PE than Amazon, Yahoo and many other internet companies would be mentioned in this article. It is growing faster than most of them and has more cash on the books combined. It has no debt and close to 80 percent of worldwide searches. I am amazed at why so many have such contempt for a company that has done so much. I guess jealously is the only answer. Or maybe they bought google to high. If google was to split it's stock the amount of times Ebay, Yahoo, Amazon has it would trade for 30-40 dollars. Thats Cheap!

Jul 12 08:56 AM

[reinharden:]

To be fair, you should probably back AAPL's $25 billion in cash out of their market cap. Which gives you a trailing PE of 19.4. Personally, for a company that's growing both top line and bottom line in the current economy while maintaining near record margins, I'd think that they'd deserve a higher PE ratio.

If I didn't already hold AAPL, I'd certainly be acquiring it on weakness.

reinharden

Jul 12 11:03 AM

[Timeline St...:]

Reinharden, I completely agree with your points, but would like to offer a correction about their cash position. Have a look at their balance sheet. Only in the three quarters did they begin putting money into the category 'Long Term Investments'. This is due to iPhone accounting minutiae, as in the difference between when they recognize revenue from iPhone (over 2 years) versus when they recognize cash (now).

The end result is free cash flow of $2.5 to $3 billion per quarter, and Apple's net cash/investments position to be more like $32.5 billion when they report in 10 days. It's underappreciated but at some point it will make the stock move sharply upward.

Jul 12 01:44 PM

[Arsuron Pap...:]

archangelms:
It's true Google trades at lower P/E than Amazon and Yahoo. I stated clearly that I see Google as a proxy for corporate spending on advertising. I don't view Amazon and Yahoo as such. I don't feel jealous of anyone who made money in the stock. I never own Google before and do not considering the stock as an investment. For a P/E of 25+, may I suggest VIVO which performed just as well as GOOG. Take a look at this chart (picasaweb.google.com/l...)
The stock also pay great dividend with strong history of raising it.

reinharden & Timeline Strategy Consulting:
Great point you make on Apple growing top & bottom line. But something always beating analysts' estimate that have me skeptical. Based on CNBC earning central, Apple have been beating since 1Q06 (data.cnbc.com/quotes/A...). It may be longer than that, but it doesn't show. Over the past 2 quarters, the company beat estimate by more than 20%!!! (28% last quarter) and yet, the stock is trading below 2008 level when the biggest beat was 13.3% in 4Q08. The chart above tells me more than what balance sheet tells me.
Look, Apple make great products. In fact, I use ALL their products including laptops, phone, and networking appliance. I also urged everyone in my house to switch to Apple. I also would love to work for them, but as a stock, I do not want to have my money there.

Thank you for all your constructive comments.

Jul 12 06:45 PM