The fourth week of trading officially ended Friday with some disappointment. Unlike the previous three weeks of the New Year, the Dow capped its first weekly loss in the month - which leads many investors to wonder if indeed the so called "January effect" ended last week. Friday brought some profit taking as several of the indices ended lower. It appears that investors seemed undecided of which course to take and how to digest the news that the U.S. economy grew more slowly than expected in the last three months of 2011. But to me, the silver lining is that it is indeed growing again. But I appreciate that not all investors have the "glass-half-full" mentality - as evident by the market's reaction on Friday.
The economy grew a modest 2.8% in the fourth quarter of 2011. However, many economists caution that the pace was unlikely to last and that it's not enough to sharply drive down the unemployment rate- which at 8.5% is its lowest level in nearly three years. Reports suggest that in the last quarter of 2011 the item that Americans spent the most money on were new cars - which then forced companies to restock their supplies at a robust pace. So for stocks that rely heavily on new car sales to further their growth such as Sirius XM (SIRI), needless to say this was favorable news. Now investors know where the 540K Q4 net subscribers came from.
The good news is that the Fed got in on the action and assured investors that short term interest rates will be kept as close to zero as possible at least until the end of 2014. This may or may not be enough to drive the January momentum into February, but it certainly can't hurt. As disappointing as it is to see the indices down, it is not a surprise as I think taking profits at this juncture is indeed the right thing to do considering that the S&P500 is up a 5% for the year. So a pullback has to be just around the corner. I'm sure that I am not the first to say this, but the market does indeed appear overbought. Having said that, there are some equities within the market with yet room to grow - here are a few of them that made headlines this week.
Apple's "not so surprising" surprise was delivered on Tuesday with the entire market on pins and needles. At what point does the hyperbole that describes the company become routine? Apple announced arguably the best quarter of all time for a company its size. For the quarter ended December 31, it reported net income of $13.1 billion, or $13.87 per share, compared with net income of $6 billion or $6.43 per share for the same period the previous year. The company's iPhone sales came in at more than 37 million and profit more than doubled for its latest quarter, surging past analysts' estimates. Revenue jumped 73% to $46.3 billion.
Analysts were expecting earnings of $10.08 per share on revenue of $38.85 billion for the quarter, according to consensus forecasts from Thomson Reuters. The company said it shipped 37.04 million iPhones for the quarter - a number that surpassed the average analysts' forecast for just more than 30 million units sold. In a call with analysts, Apple CEO Tim Cook said the company made a "very bold bet" with its manufacturing targets for the iPhone 4S, but still came up short on supply amid heavy demand for the device.
As pleased as I was with the report, I have to admit it was still a surprise even though it was a foregone conclusion that the company would produce as it did. For me, I was relieved that I did not pull the trigger on a sell order for Apple's shares prior to the report. But I did sell it the on Wednesday at $451. I figure at some point the euphoria will wane and the stock might see a slight pullback to the $435 - $440 range, at which point I will reestablish a position.
Bank of America (BAC)
For three months, the primary question surrounding Bank of America, the nation's second largest bank by assets, was can it execute its business effectively enough to make any money? It was puzzling to consider that the bank with the largest branch network could not figure out a way to successfully monetize such a great advantage over its competition. Last week, during its fourth quarter earnings announcement, not only did it adequately answer some of these questions, but it offered some insight into what might lie ahead.
By Wall Street's reaction, I can only say that the reported profit of $2 billion for the quarter was a huge surprise, because it came after having posted a loss of $1.2 billion during the same period last year. Its full year earnings arrived at $1.45 billion compared to a prior loss of $2.24 billion in 2010. During the quarter, revenue rose 11% to $25.1 billion with earnings coming in-line with analyst estimates at $0.15 per share. For the market, Bank of America's report should definitely signal that the economy is not only on a rebound, this just might be the year that the financial sector rises above the rest.
The question now for Bank of America is, can it build on this momentum or will it be back to business as usual? As mentioned previously, it has not yet been able to fully maximize its branch leverage. This is even though the company reported over $1 trillion in customer deposits, which equates to approximately one out of every two households. If you couple this with the fact that it has approximately $2.2 trillion in assets, I continue to wonder just how undervalued its stock might still be if it only produces a 'decent' return on these assets. By 'decent' I'm thinking anywhere between .5% to 1. On $2.2 trillion, this would equate to net income in the area to $22 billion - thus making the stock pretty undervalued.
On Tuesday Auriga analyst said the following regarding Cisco:
In our view, Cisco's top- and bottom-line growth targets are looking increasingly conservative; we now expect the company to grow earnings at 10% CAGR over the next five years. For FY12/FY13, we raise our estimates as we expect Cisco to gain market share in multiple segments like switches, routers, set-top boxes and servers.
In our view, the recent re-organization has reinvigorated the sales force and streamlined decision making to create a much more efficient and nimble company. We expect Cisco to successfully transition its product/services portfolio to support software defined networks and public/private clouds, thereby ensuring sustainable long-term growth potential.
I had already priced Cisco's stock at $30, but it helps to get support from someone that has covered the company quite extensively. While this sentiment has a lot to do with the sudden resurgence in the technology sector overall, the true source of the feeling has to do with how Cisco has positioned itself well to capitalize on what is now seen as increasing technology expenditures. This is in stark contrast from its previous status of last year when it allowed lesser competition such as to encroach on its market share because it was so out of focus. However, focus is one thing the company is now demonstrating to have by its last earnings announcement.
For Cisco, I continue to think that the downside risk is very limited with respect to the cash and other strong fundamentals of the company. Couple this with the fact that technology is once again a safe place to invest, as indicated by the early robust performances of the S&P 500's tech sector. If you want to break it down a bit further, in networking it continues to be Cisco and everyone else. It is clear that this tech giant has been both resurrected and rejuvenated and now is setting its sights on $30.
The term "game changer" has never been associated with Microsoft of late, but that may soon change. The company plans to introduce its popular motion recognition Kinect device to laptops and more specifically for the release of Windows 8 which is expected to arrive this fall. The goal is to bring support to both gaming and user-interface applications. I have to feel that this may indeed restore some of the companies appeal and alter its perceived lack of innovation qualities.
Microsoft has been in the news quite a bit. In one week, it issued a warning to analysts about slowing PC sales due to last year's floods in Thailand, and then the company (the following week) reported earnings that not only topped analysts' estimates, but did so by a respectable margin. The question that many investors continue to deal with is, where is the company heading next and does it have the ability to execute to compete with the other tech powers?
Microsoft posted fiscal second quarter earnings excluding items of 78 cents per share, up from 77 cents in the year-earlier period. Net income was $6.62 billion, down slightly from the $6.63 billion a year ago. Revenue was $20.9 billion, a 5% increase from $19.95 billion a year ago, helped by its Office, server software as well as Xbox businesses. This affirms what I have been saying for quite some time: Although the company is no longer growing to the extent it was in the late 90s, it still remains a technological power.
As a long time shareholder, I can tell you that the company has had better reports. But one thing that it has also had is good sound management. Warren Buffett once said, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." If you subscribe to this belief as I do, you will be hard pressed these days to find any management team who deserves more credit than those at Oracle.
In the quarter ending November 30, the company reported a profit of 54 cents per share while analysts were projecting profits of 57 cents. The bright side of the report was that new software sales rose slightly - 2% year-over-year to $2 billion. Management also added that it expects hard revenue declines of 5% and 15% while also projecting new software sales growth of flat to 10%. That was another disappointment as analysts were forecasting growth of 7%.
With the stock now trading at $28, after having bounced off its low of $24.72 in August of last year, its growth projections currently place a valuation at $35 - this is even on the most conservative assumptions. The bullish case for Oracle is simple, as businesses continue to strive for growth, it will place more demand on IT services. And as IT services get more complicated, it will require the level of expertise that Oracle provides to manage these complications. Oracle is a buy!
Research In Motion (RIMM)
It stands to reason that since the company has been in a death spiral as Apple commenced its ascent, it will likely maintain such status as Apple's supremacy grows. The question for RIM is, how much downside risk does the company still have considering that performance expectations are so low? With the hiring of a new CEO, the company has bought itself a little bit of time while it sorts things out. However, it doesn't seem as if it will be much of a difference from the old regime.
Will the company be able to execute in the manner that it needs to in order to convince shareholders that it has what it takes to perform a resurrection to the extent of that of Apple at the beginning of 2001? That too remains to be seen. One of its advantages is that it still has a big stronghold in the enterprise business. Along with Mobile Fusion, the company should seek to scale down some of its operations by discontinuing legacy platforms and commit to offering strictly enterprise business services, but its execution has to be precise and its investors have to forget the past. Regardless of how it performs from here on out, it is hard to consider that the space is remotely big enough for any potential success that it may have and that of Apple's.
Sirius XM (SIRI)
For Sirius XM's stock, it's a little bit more challenging to assess how it should be perceived, because there's good news and there's bad news. The stock has surged from $1.78 to a recent high of $2.19 but since then has dropped 7% to close on Friday at $2.04. Last week I saw what resembled significant upward pressure. Put another way: All of the good news for the stock had already been priced in. This was the only way that I can describe why the stock could not break the $2.18 wall of resistance. As soon as it approached that level, it invited heady profit taking.
Sirius will report its Q4 full year 2011 earnings announcement on February 9. I am eagerly anticipating learning how Sirius guides for the coming year. Consensus subscriber estimates stands at 1.5 million subscriber additions. If this is what Sirius announces, it will be difficult to expect the stock not to step backwards. But will Apple's stellar numbers be enough to spill some optimism toward Sirius' way? Investors want a reason to send the shares higher, while shorts want to be vindicated for their 305 million bets in short interest. With less than 10 trading days left before the report, who will be right?