Over the past couple of months, I've been in awe at how clueless some people can be when it comes to the markets. Listening to rumors is never a good idea, but it seems that people are doing it more and more, and then wonder why they are losing so much money. Just in the past couple of days, there have been a number of things that have made me shake my head. Here are the five rumors I've been laughing at, ones that you don't want to lose money on.
1. Mention the word iPhone, and the corresponding stock is worth an infinite amount:
Apple (AAPL) released its latest iPhone recently, and while sales are expected to be tremendous, that doesn't mean that everyone benefits from it. Obviously, if you want to benefit the most, buy Apple, but remember, it's only one product. Apple has several others. People have questioned Apple's recent share drop, but remember, iPad sales may not be what many expect, and iPod sales are declining.
But I'll get back to Apple later, as there are two better names to focus on here: Triquint (TQNT) and Sprint (S). On October 12th, Triquint closed at $5.93. The next day, rumors came out that the new iPhone had a Triquint chip in it. The stock jumped 25% that day and traded as high as $7.76 (on the 14th). On October 26th, the company announced its earnings and lowered guidance. The stock got hammered, dropping below $4 the other day. Anyone that bought above $7 on those rumors has lost 40% or more. If you want to play the chips in the iPhone, stick with Qualcomm (QCOM), it's a better idea.
The second laughable company is Sprint. While Sprint probably needed the iPhone to stay in business, everyone seems to be expecting the name to double by the end of the year. That's hilarious-- Sprint has a market cap of $8.1 billion and outstanding debt of $20 billion, plus it has already said it needs more capital. The iPhone deal is over four years, meaning Sprint will not see tens of millions of those phones for another couple of years. If you thought the company was selling all of them this quarter, you obviously have no clue. Over the past two months, I've watched analyst estimates for Sprint's 2012 earnings per share drop every single week. They are still losing billions of dollars each year, with no end in sight. By the way, Sprint is down since it started selling the iPhone.
2. Research in Motion (RIMM) is now a BUY!
Research in Motion jumped on Tuesday following one analyst's upgrade. One. It's hilarious to think that one upgrade means the stock is now a buy. But apparently it seems that way. RIMM shares at their high point had jumped more than $3 off last week's low. That's close to a 13% gain. Can someone tell me what's made this company worth $1 billion more this week than last week? I just don't see it.
Now, RIMM has had a 50% drop over the past three months, but just because something has lost 50% doesn't mean it has to go back up. It could easily-- and I think it will-- lose more. The best thing about that one upgrade. People forget the one downgrade from Monday and last week's multiple downgrades. In fact, last month, 13 analysts had buy ratings on RIMM and 15 had sells or underperform ratings. Now it's 8 buys and 17 sells. Oh, by the way, the one analyst that put a sell rating on RIMM yesterday previously had a buy rating. What does it say about a company when an analyst puts a sell rating on the stock after a $25 drop, while they maintained their buy rating all the way down from $40 a share?
3. Google (GOOG) will break out of this range:
Take a look at this one year chart of Google. Notice a pattern? Okay, now look at this two year chart. Have you found the pattern yet? Google has been rangebound for the last couple of years, despite growing revenues and income. A couple of years ago (like two), I remember a number of analysts coming out with $700, $800, even $900 price targets for the name. By their predictions, we should have been there by now. But we're not, and unless this stock splits soon, I don't see us getting there anytime soon. Currently, analysts price targets range from $645 to $850, with the average around $730. If we can't even break the lowest target, how are we ever going to get to the high one, let alone the average?
I've noted in the past that Google has become a predictable sell above $600. Can you blame me? When the company reported earnings in mid-July, everyone said that "this was the quarter that would get Google going again". The stock rose from $530 to $600 immediately, and even topped out around $627. But then it fell back again, even down to $480 on October 4th. Then on October 13th, it reported earnings again. It jumped to $605 plus in the pre-market the next day, but we were back to $580 within days. A few weeks ago, it got as high as $618, but that didn't last. Last Friday, we were back to $561. Google has become the perfect rangebound stock, and until we see a split, a buyback, or something else, I'm not a buyer.
Google ended 2009 at $620 a share. Revenues then were a third less than they are now. EPS was more than 40% less, and yet the stock has gone nowhere.
4. Apple's valuation cannot go any lower:
It's gotten to the point that numerous articles have appeared on sites, including this one, calling Apple the cheapest, or most undervalued company in America. That simply is not true. Apple's P/E (trailing) and Forward P/E are significantly lower than they were a year ago, two years ago, etc. But that doesn't mean they can't go lower. At times, Apple has been the biggest company in America, at almost $400 billion. Do you expect it to have an Amazon (AMZN) like P/E? I'd hope not.
At one time, Apple traded at a P/E of 25, 30, and higher. But like all mature companies, that number has come down. Microsoft (MSFT) once had a P/E of 20. It now stands at 10. Research in Motion actually trades at a P/E just barely above 3. Yes, I said three. Apple's P/E has gone from 25 to 20 to 15 in recent years, and it now stands around 13.8, with the Forward P/E at 10. It is extremely possible that both of those will go lower, and I think they will.
My prediction for Apple for its 2012 fiscal year (ending next September) is for $37 of earnings per share and a multiple of 12. That gives you a value of $444. But notice, my multiple for the company is 12. The current one is 13.5. It can go lower, and I think there's a 100% chance it does.
5. One Good Quarter Doesn't Mean You're Back:
I've seen a lot of recent press that Meg Whitman has completely turned around Hewlett Packard (HPQ) and that the company is back from the dead. I'm not arguing that HP isn't back from the dead, I'm just saying let's wait at least another quarter before saying that the company is back. Remember my earlier Google example? It still hasn't broken out. Sprint has also had great quarters recently, beating estimates in three of the past four quarters. But that doesn't mean it's back. In fact, the stock has gone lower.
Let's wait another quarter before we give HP the thumbs up. Let Meg Whitman prove she can do this job. I'm not a believer yet, but I will change my opinion if she starts to deliver. A good way to think about this is the case with Cisco (CSCO). When everyone was leaving it for dead, the company reported a great quarter in August and the stock jumped. It traded sideways for a few months until it could prove that this was not a one quarter fluke. When Cisco recently reported another good number, the stock jumped.
I'm not saying I don't believe in HP's turnaround, but I need more than one quarter of confirmation. I am giving it the chance to prove itself before I make a definite recommendation on the name, but let's not celebrate yet. Now is the time for patience.
Some of these rumors might seem rather obvious, but I assure you, they can lose you plenty. Just ask holders of Triquint or Sprint. One pop doesn't mean you should buy, and one analyst's buy rating shouldn't overrule the fifty others that cover the name. The iPhone will be a great seller, but that doesn't mean everyone will make money off of it. Valuations can and will come down over time.