Warren Buffett once said “A public opinion poll is no substitute for thought.” It should come as no surprise to you that I agree with Mr. Buffett. In fact, there isn’t anything with which I can ever disagree with “the oracle” as it relates to investing. But these days it is public opinion or the negative perception that is driving the market in the downward spiral that investors have witnessed.
The reality is our confidence in the economy often determines our spending habits and the more we spend better are the earnings in the companies that we invest; it’s a situation of cause and effect. In fact, I continue to attribute the languishing performance of several of my holdings to the poor economy; namely Sirius XM (SIRI), Cisco (CSCO) and Oracle (ORCL). Basically, in relative terms, there are no fundamental reasons for the stock’s poor performances, the fault lies solely on the consumers and investors for their lack of confidence in our economy.
I use these three companies as examples because each have recently produced what I would consider “blown away quarters” yet the stocks have either not moved or went down. In situations like this, the company has done its part; the rest is up to the investor and Wall Street to hop on board. Let’s take a look at Oracle; a company I once warned investors to not confuse its routine success with failure. It seems no matter how well it performs, it just does not get the love that it deserves.
An excellent bull case was written by Seeking Alpha contributor, Helix Investment Management who described its recent performance this way:
- Over the last quarter, as market hysteria grew, Oracle produced great results. New software licenses, a gauge of future revenue, grew 17%. Hardware gross margins rose to 54%, as the company gave up sales in exchange for profitability, something we think is a prudent move. On the company's last earnings call, Safra Catz, Oracle's President and CFO, noted that there is a lot of Company specific (pdf) momentum that has allowed Oracle to thrive. Oracle's GAAP EPS grew 36% year-over-year to 36 cents/share and its non-GAAP EPS grew 14% to 48 cents/share.
- Oracle's financial strength just keeps rising. Free cash flow reached a record $12.3 billion in the last 4 quarters, and Oracle has over $17 billion in net cash, or $3.30/share. Oracle has indicated that it will deploy its cash aggressively, ranging from share buybacks to acquisitions, to dividends. Oracle does not hoard its cash, but it generates so much of it that it has a comfortable cushion of safety. Oracle pays a quarterly dividend of 6 cents/share (0.8% yield), and we think the dividend has much farther to rise.
Though Oracle’s stock has seen a recent decline in value, the company itself has not disappointed. The stock’s decline clearly has been the result of the lack of consumer confidence.
Another example is Cisco. On August 10, the company reported profits that beat analysts’ estimates. Excluding some costs, profit was 40 cents a share compared to the expected 33 cents. Sales rose 3.3% to $11.2 billion in the period, which ended July 30, compared with an estimate of $10.98 billion. As much criticism that I have given to Chambers, I have to now give the man credit for what appears to be the beginning of a remarkable turnaround in the company.
It is clear that the restructuring enacted by Cisco has strengthened my previous assessment that Cisco is not only great value at current levels but will likely continue to grow in the face of a struggling economy. Again, the only reason Cisco’s stock is not in the $20s is because investors are unable to yet see the light at the end of the tunnel. There is no optimism at this point to spark neither investments nor capital expenditures; which many companies such as Cisco, Microsoft (MSFT) and Dell (DELL) rely upon for increased earnings.
However, the best example of the three has to be that of Sirius XM. I admit that the last three months have been a disappointment for the stock, but it has not been due to anything fundamentally related with the company as with Cisco and Oracle. Sirius has had an incredible first half of the year, during which it has twice raised guidance. After its recent earnings earnings report, not only did Sirius generate revenues of $744 million, the company also reported a bottom line number of 3 cents per share. According to CEO Mel Karmazin:
- With the excellent subscriber performance recorded in the first half of 2011, we are now confident that we will exceed our previously announced 1.4 million net subscriber addition guidance for 2011. Today we are raising our full-year guidance to a projected 1.6 million net subscriber additions. After a strong first half, we now expect free cash flow in 2011 will approach $400 million, up from our prior guidance of approaching $350 million.
In 2011, the company continues to expect full-year revenue of approximately $3 billion. Sirius XM's adjusted EBITDA projection remains at approximately $715 million. Also for the year, self-pay churn and conversion rates for should remain steady or comparable to 2010. I’ve said this before; investors can clearly see that the company will continue to outperform the stock. But the stock in due time will catch up.
These are some examples of how consumer confidence or lack thereof have frightened investors from performing the most fundamental aspect of investing which is to “buy low.” There are also case of companies whose stock have been beaten up due to its own fundamental issues; Research In Motion (RIMM) and Hewlett-Packard (HPQ) comes to mind here.
Earlier this month RIM reported second quarter net income that fell by almost 60 percent to $329 million, or 63 cents a share; a significant drop from $797 million, or $1.46 a share, in the same quarter a year ago. Revenue also fell by 10 percent to $4.2 billion; much larger than what any analysts was expecting. There is really no other way to spin this except to admit that this was a poor showing of execution. Furthermore its gross profit margins dropped to 38.7 percent from 44.5 percent a year ago. Not only is the company now bleeding cash, but it reported increased inventories; mostly from poor sales of its PlayBook tablet.
In the case for RIM, consumer confidence was not the issue; it has failed to adequately compete with Apple (OTC:APPL) and Google (GOOG). I guess you can say that consumers were not as confident in its BlackBerry and PlayBook devices as they were in the latter two companies.
Clearly, in all aspects of life confidence (whether in one’s self or in others) is a great thing to have. It can lead to a lot of events that may or may not have happened had the confidence to “engage” not been there. There is also this thing called “self fulfilling prophecies,” which works similar to confidence or in inverse order when it is lacking. In financial matters, that is to say, if consumers don’t have confidence in our economy, it will lead to less spending, less investing which only further creates and economic depression.
So essentially, by being afraid of our economic condition, we are thereby making it worse that it already is. This is why I agree with the notion that investors should be careful in how they translate consumer confidence numbers into investment actions. While I don’t think the numbers should be ignored, I do believe that investors should focus more on the company’s fundamentals and less on public opinion polls.