Often times stock market giants continue to grow to the moon. The most clear example of this is the pre 2000 run up when many stocks increased to incredible levels over a few year span. Unfortunately many of those stock market survivors will be hard pressed to continue long term growth patterns; but this does not mean investors should expect continued losses over time.
Contrarily investors can sleep easy knowing certain stocks are safe havens for their money while collecting dividends and the opportunistic share price pop. Below I will outline four stocks that may have their best days behind them and may not see long term upward momentum in the future.
The first company that has not seen stock price movement in a decade is Microsoft. Microsoft's lack of innovation directly relates to the lack of share price movement. It is important to note Microsoft has not struggled with revenue and net income. In fact, since 1996 revenue has grown over 700% and net income over 950%.
Also, if not for the fiscal year ending June 30, 2009 Microsoft would have reported sequential revenue growth year over year since 1996. Similarly net income has only decreased sequentially two times in that period. This indicates the company is bringing in solid revenue and a large customer base continues to follow the company.
Microsoft's yearly revenue since 1996
While this continuous growth has been good for the company, the stock has not reacted as well. Revenue spiked in 2008 due to various reasons including the 2007 release of Windows Vista. After the revenue spike in 2008, sales decreased back to the 10%-13% growth rate year over year. While a 10% growth rate is not bad, it will not lead to the same stock highs we saw in the late 1990s when revenue was growing over 30% year over year.
The stock has not been able to hold above the split adjusted $30 level; disregarding 1998-2001 when technology stocks rocketed due to insane valuations. Nevertheless, the share price has bounced between $22 and $28 since 2002. Keep in mind the stock dropped below $20 during the 2008 and 2009 stock market crash. This drop followed Microsoft's fiscal year ending 2007 and 2008; which were the best two years for Microsoft since 1999.
Most importantly, after the stock recovered from the 2009 low, the share price continued to stagnate at the same level we saw prior to the slide. This indicates investors are comfortable with Microsoft after pullbacks because the company typically produces an increase in revenue of about 10% (+/-3%) every year. On the other hand, investors are not willing to put speculative money into the stock; which is why Microsoft's P/E ratio is under 10.
Microsoft lifetime chart
click on image to enlarge
It is important for investors to realize Microsoft is one of the stock market bellwethers. However the share price will struggle to reach new highs because the company is not growing at rates that can sustain a bull run. The stock did see a big run the second half of 2007 as the company reported strong earnings from Windows Vista. Therefore investors need to remember the stock could take off if the company releases a new innovative product.
Unfortunately I do not see this happening. Even with the 2.6% dividend, Microsoft falls under the category of a great company, but not a great stock to retire with until the dividend is around 5%-7% per year or the company releases a new line of products.
Another technology giant that has faced similar stagnation is Cisco. Cisco's stock has not been as strong as Microsoft over the years. Part of this is due to Cisco's stock growing too high during the golden years at the end of the 1990s. Most importantly, the change in Cisco's net income since 1999 can be directly compared with the changes in share price during that period.
It is better to focus on net income because Cisco's revenue has grown year over year with the exception of fiscal year ending 2002 and 2009. Therefore, among other things, net income is more likely the reason investors punish the stock.
Cisco's revenue and net income since 1999
First off, Cisco's worst quarter since 1999 in terms of net income was the fiscal year ending 2001. Unsurprisingly the stock plummeted during 2001. This slide looks like a coincidence as the stock market crashed in 2001, but it appears Cisco's stock was hurt more as the company faced severe income issues; even though the company was able to accumulate revenue not seen until 2005.
Cisco chart showing fiscal year ending 2001
The next important comparison to make is the fiscal year ending 2003. From 2002 to 2003 net income grew about 89% while revenue remained flat. After the bottom in October 2002, the share price grew about 122% within the fiscal year and the stock finished the year up 43% from July 2002. This can be attributed to weak expectations as well as a weak first half of the fiscal year followed by a strong second half. Nevertheless investors felt comfortable investing in Cisco as the company began to show strength.
Cisco chart showing fiscal year ending 2003
This same pattern can be seen during the fiscal year ending 2007 when net income increased about 30% and revenue increased 22%; which makes the fiscal year ending 2007 the best quarter of the decade. Similarly as net income decreased during the fiscal year ending 2009, the stock slid. Again, this may seem coincidental, but the stock was punished more harshly as investors looked to sell any stocks that had weakness. More recently, as the company has been unable to grow at comfortable levels, the stock has continued a steady downward trend since April 2010.
Cisco chart over the past three years
This indicates the company may report weak fiscal year 2012 results. However since the share price has pulled back further than the overall market, the stock may not make any big slides related to earnings for about 2-3 quarters.
Furthermore investors should keep in mind Cisco's share price could fluctuate between $15-$25 for the rest of the company's lifetime. Unlike Microsoft, Cisco does not have a worthwhile dividend investors can trust to keep their portfolio in the green in the long term.
A third technology giant that falls in this same category is Micron (MU). Micron is similar to Cisco because the company has been unable to grow net income. While revenue has increased at a snail's pace, net income has not impressed investors over the past 4-5 years. Since 1996, Micron has reported an overall net loss eight times. Surprisingly the net loss in 1999 was one of the factors that led to the amazing 183% share price run over the first half of 2000.
The stock rocketed because the company reported a net loss of $68.9 million in the fiscal year ending 1999; which caused a steady sell off. The next fiscal year ending in 2000 Micron reported net income of $1.5 billion; with most of this income coming from the first half of the fiscal year. Similarly revenue increased 95%.
Unfortunately for investors, the company reported disastrous earnings the second half of 2000 and the stock dropped 64% in five months. In retrospect the share price drop was expected because in the fiscal year ending 2001 revenue dropped 46% and net income fell back to a net loss of $625 million.
Micron's yearly net income since 1996
It must be noted the most recent fiscal year showed signs Micron may crawl back out of the closet. However this may have more to do with increased demand for tablets and smartphones in 2010 and less to do with a sustainable long term run. With that said, Micron may see increased revenue and net income the next two years. As you can see above, net income follows a pattern since 1996.
The pattern consists of three sequentially down years followed by at least two sequentially positive years. In 1996, 1997 and 1998 net income decreased year over year; followed by two years of increased net income in 1999 and 2000. This is then followed by three more years of sequentially decreased net income. Which leads to the trend beginning again. If this pattern holds true, we should see increased net income for the fiscal year ending in 2012.
However this pattern may be broken because the company has only reported net income of $302 million the first three quarters of fiscal year ending 2011. On the other hand revenue is on pace to set a record amount because the company has reported over $6.6 billion in sales after the first three quarters.
This will set up a tough decision for investors because the stock generally reacts to net income just as Cisco, however with the increased revenue investors may decide Micron has an opportunity to break out of the slow revenue growth slump.
The good news for investors is the last time Micron's stock saw any sustained momentum was during the fiscal year ending 2006. In 2006 the company reported net income of $415 million on, at the time, the company's second highest revenue of $5.27 billion. Therefore if the current fiscal year can bring in strong numbers, we may see Micron's stock move quite a bit; which would make Micron's stock severely undervalued at the current level.
On the other hand, Micron does fall into the category of stocks that may have seen their best day and will forever hover between a certain range. Micron's range may be between $4-$10. However it is difficult to give a bottom because the stock has continued to slip as chip stocks continue to take a beating on fears demand is slowing.
Micron's chart showing the fiscal year ending 2006
JP Morgan Chase (NYSE:JPM)
While the three examples above are technology stocks, other sectors have seen the same stagnation. JP Morgan Chase's stock has stalled over the past decade. While the share price has bounced up and down, investors have not seen the stock come close to 1999 and 2007 highs.
One of the most important differences JP Morgan has compared to the three technology stocks is a much less predictable pattern. While the technology stocks tend to follow constant patterns, JP Morgan's share price is influenced by economic news as well as the company's news; which can drastically change the share price.
JP Morgan Chase's revenue and net income since 1998
JP Morgan chart since 1983
Similar to Cisco, JP Morgan's chart directly reflects revenue and net income. As you can see by comparing the chart with the revenue and net income numbers we see a simple correlation. Over the years of 1998-2000 we see the share price increase in line with yearly revenue.
This is followed by a drop in the share price and revenue numbers until 2003. We then see increased revenue until 2007; which is similar to the share price increasing over this same period. The trend can be applied to the three most recent years as well. Investors can use this pattern to decide when to buy and sell JP Morgan securities.
Investors can use the trend outlined above to decide when to buy and sell JP Morgan securities because revenue and net income indicate where the company is going. Currently after the first half of the year, JP Morgan is set to report record net income. While the company reported net income of $17.37 billion in 2010, the company has reported almost $11 billion the first half of 2011. Therefore according to the pattern previously outlined, JP Morgan's share price should gradually increase the next 2-5 quarters; assuming the company does not face any unforeseen drops in net income.
On the other hand it is important to note JP Morgan's revenue is $770 million behind the first half of 2010. If revenue is about even as 2010 and net income beats 2010 by 5%-10% we should see the share price move upwards over the next 2-5 quarters as investors see the company is moving money in the right direction.
The above trends are important for investors to recognize because solid investing decisions can be made in these stocks as well as others. Trends that correlate earnings and share price movement are important to recognize when investing in a long term growth company as well because these patterns will continue for quite some time. Also, as I mentioned previously, these stocks have relatively little volatility if the share price stays low. For instance, as Cisco's stock price continues to rise the stability in the stock will decrease.
My tone may sound bearish towards these four stocks, but the truth is any one of them could reach news highs with a new product or new partnership. For example, if Micron can land the sole rights to producing iPad and iPhone chips, the stock would rocket to 15 without any problems. Investors should not expect these kinds of lucky breaks because they are speculative.
Of the four companies above, the best ultra long term choice is Microsoft. While the company may be one of the biggest disappointments over the last 10 years, the company has the most consistent revenue. Along with a dividend that only trails JP Morgan by 0.20%.
It is also important to keep in mind the technology and financial sectors are struggling. In comparison the technology sector has a greater chance to cycle back to the front of the stock market because the financial sector is carrying very low confidence levels right now. Furthermore technology stocks tend to stagnate; while financial stocks tend to pop up and down more frequently. Technology stocks tend to stagnate because the major companies continue producing consistent revenue and net income which leads to a consistent share price. On the other hand financial stocks tend to be dictated by national and world economic news as well as lawsuits still lingering from the irresponsible loans of the mid to late 2000s.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.