Sell These Three Stocks Before Everyone Else Does

One of my favorite parts of Investors Business Daily, the best investment newspaper to read for reasons beyond because everyone else reads it, is the occasional feature where they highlight a stock from the past and ask the reader whether it was a buy or a sell. In that spirit, what should an investor have done with this mystery stock in late 2004? (Click all charts to enlarge.)

As you can see in the chart below, which includes the name of the company, it was a sell. I had expected so back then, and here is why. 2004 was a pretty flat year for the market and one in which most companies were showing deceleration in earnings after the explosive growth in 2003. As a consequence, there were several stocks that benefited from “crowding in”, as investors had to own the fewer and fewer names that were showing acceleration. As you can see, this company was enjoying accelerating EPS (note that the slight deceleration at the end wasn’t reported until early the next year). You can also see that the PE was back to the bubble highs and the PEG ratio was an astronomic 2.4X. Of course, starting the first trading session of 2005, the stock got hammered and ended up underperforming the market the next year. Why then, and not a little earlier? Two reasons: Tax consequences and window-dressing by institutional portfolio managers. I used this single example, but there were several names from that year (and every year) that illustrate the point.

So, which stocks are candidates this year for a trade if not an outright sell? I used StockVal and identified many candidates that were extended and expensive, widely owned institutionally and not facing any binary types of events, but I settled on three in particular that I believe could suffer from significant selling out of the gate: Apple (AAPL), Intuitive Surgical (ISRG) and Jacobs Engineering (JEC). I am not suggesting that these are long-term sells, but they could in fact be.

AAPL is the most expensive of the 27 S&P 500 stocks with a market cap in excess of $100 billion. In fact, AAPL and GOOG are the only mega-caps with a PE in excess of 21. Note that the stock has been soft in each of the past two years. I am inclined to think that this may be more than just a short-term sell, but calling a top on this one has been quite challenging. Steve Jobs escaped pancreatic cancer and the options back-dating scandal, so maybe he can avoid the rapidly deteriorating consumer spending environment. I see support at 155.

I am so reluctant to mention ISRG, as it is truly a great company. As I have learned, though, never fall in love with a stock. While ISRG is a monopoly of sorts, there are no assurances that they will keep blowing away estimates. A hiccup here on machine placements, which are still about ½ of sales, would be devastating. Will it happen? No clue, but it sure could (it has before). Hospitals aren’t the best capitalized entities out there and they could sure pause. It would most likely be a buying opportunity. Even if not, though, the fear of such an event could surely knock 10-20% off the stock between now and when they report Q4. I see support at 265.

Of the three, this is the one I know the least. I do know that it and its peers are riding tremendous global expansion themes. Margins are expected to expand to an all-time high of 4%. Any sort of concerns about a slowdown in China or India could be a catalyst (if one is necessary). Over the past 20 years, the PE has been between 10 and 33, with a median of 17. I see support at 81.

Disclosure: No position in any of these stocks

Comments

[Jon T]

Brochstein says Jacobs is the company above that he knows least
about.

Well, it seems to me he knows much less about APPL, or perhaps he's trying to create a buying opportunity having missed out before.

Does he not listen to the reports about holiday season Apple store sales? Apple is set to have a record season.

And with Apple blossoming and Windows Vista wilting, its Mac sales will for sure march ahead strongly taking nice new slices of market share.

And you don't need to wonder what sales of iPods and iPhones will do, the latter as they role out round the globe.

Perhaps Brochstein isn't the sharpest knife in the drawer... time will tell.

[Tommo_UK]

Jon, these guys trying to time an "AAPL top" call are a dime-a-dozen, and they're routinely wrong, which is why they always lay on the caveats thick and fast. Why sell a company growing earnings by 40-60% YoY with no sign of a slowdown?

AAPL "looks soft" the last two years? yeah.. a 250% gain - very soft indeed.

[imthewiz]

Get your head out of your charts. $34 to $85 in 05 is soft??
Your soft. In the head.

[Jon T]

Thanks Tommo - and well said!

[Kontra]

"I see support at 155"

No, you don't; you're blind to facts and history.

[User 130927]

you're a short seller. Stop making stuff up. With its current sales aapl is a 275 dollar stock. And by the time it gets there it will be a 400 $ stock. No one looks at PE for growth cap. Look at pEG and stop pretending you know how to read charts and numbers. Soft. You must be smoking something hard!

[Le French]

This guy should stop drawing meaningless isocost lines and start considering deferred sales revenue from the Iphone and the brand value of Apple. What a dumbass! Apple is a symbol for students and I'm so surprise how people don't understand that we will all graduate in 2/3 and guess what? We are loyal customers...

Recommendation: Apple is undervalued
Sentiment: Strong Buy Long-Term

[Tom B]

People forget: the Treo has sold over a 100 MILLION units to date. The Blackberry has also racked up massive unit sales. And these puppies are primitive toys compared to the iPhone. Selling now would be madness.

[Alan Brochstein]

Perhaps I wasn't clear - I meant that AAPL has been soft at the BEGINNING of each of the past two years. Wow, you guys are pretty emotional - good luck!

[Moe]

The above comments alone tells you that everyone is leaning the same way on AAPL...."with current sales AAPL is a $275 stock"...what does this mean and if this is the case why is the stock at $186? .....no one looks at PE....they look at PEG? The use of PEG is hilarious..the fact that you are using PEG tells people that using PE no longer works and you now need to switch metrics to value the stock (see internet bubble)..for the record the bulls are using a cash flow metric to value AAPL...not PEG. I have no position in the name and Im not convinced it doesnt go higher....but the defensive nature of the commentary above tells a lot about the stock and sentiment.

[Donkey]

Yes I'd call it 'soft' too if it has over 150%-200% gain. what a 'soft' stock, I was expecting 2000%-4000% gain!

It's funny how someone thinks the stock is 'Soft' yet encourage people to 'sell' them. Shouldn't it be 'buy' instead?

Because of this ridiculous post, I am raising my 09 Target for AAPL to $583.45 and going to buy another 100 shares today!

[Moe]

Im not here to defend anyone but for those who prefer to talk before they do their homework.......AAPL stock was flat Jan 1 - March 1 in 2007 and in 2006 from Jan 1 to July 13th AAPL stock was down over 30% (which is what the author of the article was saying).....again I have no position in AAPL but Im surprised by the reaction to this article.....people have a problem seperating the stock from the story.

[Denise]

Hmmmm, Alan I notice you seem to not want to take responsibility for your words especially when you are trashing other people and their businesses. For instance you talk about Steve Jobs in what seemed to me to be a negative way -- and then you say others who call you on your lack of reality "emotional".... wow! Now I don't want to speak for anyone else but I sense that most of us who have ever bought Apple stock have done so because they were so impressed with the products and wanted to be part of a great company. So, I doubt many apple investors sell their stock and those that have probably didn't really want to. Anyway, the point I wanted to make to you Alan, is that while you are trashing Apple and then calling the guys who are calling you on your crappy attitude, you are the one getting emotional. And then you have the nerve to quickly write a response that spits your emotional reaction right back at them. If you are not one of the brave souls out there doing emotional purification work with a good therapist and or group then I say to you "Good Luck" -- smartass!

[HarMegiddo]

buy ISRG all day at 280

[Muzie]

I think I was more convinced by the comments than from the actual article.

To sell that is.

These people are obviously in love head over heels with their stock. Mr. Brochstein just wrote 6 sentences vaguely pointing to APPL going down and that was sufficient to generate 10 comments (or should I say insults) pointing to the contrary. Nothing very rational going on here.

[iPodFan]

I don't think this is about being head over heels in love. It's about how the facts are construed. Apple's lowest quarter is Q2. Q3 and Q4 are the EDU season and Q1 is the holiday season. Since Q2 is Jan-Mar, the stock being soft during their "down" quarter isn't really unexpected. People are waiting to see what's going to happen during the EDU selling season and again over the holidays. I don't see this detail as having any relevance in a "buy" or "sell" recommendation. My dad freaked out and sold at $59 because of all these same types of weird theories. I'll wait until it's clearly on the downturn knowing that I didn't sell at the high rather than selling while still going up!!!!!!!

[jonreagan]

OINK, OINK!

There is a foul odor in the air---the stench of a short pig.

Don't represent yourself to be some kind of financial expert, when you're just trying to drive down the price of a stock. Bringing up Steve Jobs and a two year old case of cancer--long since cured--is just downright creepy. All of us are trading and/or investing to make money, grant it....but why don't you get out your tin cup and go begging somewhere if you're that greedy for a few bucks.

[raylo]

i agree. All these comments regarding Apple are not defensive or emotional, but just pure reactions to facts that are not recognized by this stupid shorting selling author, Alan &^%#$ !! Yeah, if I see Apple drops to 155, I'll take out a mortgage and buy all that I could. Enough said. Amen.

[lefty]

Be careful out there! I fell in love with microsoft in 1999.

[Denise]

Lefty, never fear about falling in love... just try not to fall in love with money. Our only real power is our love and our only real issue is how do we manage our power, which can translate into "how do we manage our money and what products do we want to invest in?" The first time I ever typed on a mac I had the experience of connecting with a product that was of top quality. Never have I felt that way on a PC. In fact except for a few business brochures I created on my old PC the only other powerful experience of pleasure I had was swapping out my hard drive.

On the other hand, I have loved my ipod and definitely have a sweet relationship with my iphone. I live near Malibu where there were fires and my internet/cable company lost their server so I wasn't able to be online for almost a week but could always access the internet and do my business from my iphone. These experiences are the reason why Apple has been so successful. Microsoft has been successful because it has catered to the masses and for that I am grateful but with Apple, well it's like a great car... its a 'kind ride.'

The main point I am trying to make here to all of us 'rational' investors is maybe we can have both: our investments in companies that we also have some emotional attachment to. And that maybe that's not such a bad thing. To put the power of our money into something of quality that brings us positive pleasure, is to me, healthy.

[raylo]

Well said, Denise !!
Microsoft has had its run before and 1999 was the dawn of the tech bubble. To fall in love with any tech stock at that time proved to be fatal. Apple's a different story now with strong fundamentals and outlook, so why not indulge in its success for a while before it fades away. Every company will go through boom and bust cycles and Apple is no exception, I remember not too long ago that Apple was selling for less than $30/shs. So enjoy it while we can.

[A SMARTER GREEK]

ISRG/ You are trying to shake the tree.....with a maybe sell "if".
First of all get your facts straight. 70% of sales last quarter was from the razor blades..not the razor! Less than 10 are in Europe. Those earning cash from about 650 Davinci's in USA. They can eslilly 10X Europe in the next 18 months and doublde USA. That should 3x-4X earnings from here. Plus new products and new FD approvals for other procedures. The insurance companies love this company as the averae patient stay in hopsital is cut down less than half, and much less human error. Trading wise this baby is a yo-yo, not for the weak in heart. But furure in my book shows this baby based on Actuall $$ made! This stock will be at a new high Mid-Jan. Break up to over $425 after earnings announced on Jan 31. Then with 3 to 1 split should be trading between a low of $175 to $225 this time next year! Have fun!!

[Denise]

Thanks Raylo ^_^

A friend who works for a large investment company tells me they have a very elderly client who bought Apple shares at $10 and, of course is still holding! I'm not so sure about the normal business cycles with Apple. They've been around so long and just when I thought they were just a great computer company they start up itunes and we have ipods. I'm actually wondering what Steve and his crews will dream up next.

[tomtiger]

First of all, I own AAPL. I first had esperienced an Apple product as a teacher. I bought one about 20 years ago and loved it. When i got serious about investing I naturally invested in AAPL because of the products. I bought more at $193 because i see the ipods everywhere and the new models that everyone wants. I see the new Leopard Operating system driving the Mac sales. I see the iphone sales growing and China coming aboard soon and the new 3G phones that will be coming. Open your eyes and SEE.

[Alan Brochstein]

While AAPL didn't yet touch the 155 I envisioned, it did trade as low as 168.30. I still expect to see 155. JEC got within pennies of the 81 I had suggested. Finally, ISRG traded 10 points below the 265 I had suggested. Bottom-line: Tough market helped, but each of these endured severe profit-taking in the absence of news, falling more than the NASDAQ or the S&P 500 from the time this article was published. We'll try again next year!

[gmm95219]

Alan
I wonder if any of these people will apologise to you openly

[Alan Brochstein]

Yeah, right!

[jcrash]

They all go lower this week.

[AC]

Alan,

I am new to investing. I started watching/reading about stocks/ETF's/mutual funds in earnest on 12/26/2007. Been watching about 20-30 stocks and ETFs. Apple and JEC amongst them. I found your article around the first of the year.

I felt the reaction in the comments was stronger than warranted and it was obvious that many did not seek to understand what you were saying. But, in fairness, when the headline is sell when the company seems to be doing fine, is never a good way to start a balanced discussion. Good for getting the column read, bad for discussion.

Anyway, I see you were pretty much dead on for the 2 I have been watching. And looking at the other looks like you were dead on.

[Alan Brochstein]

To paraphrase Cramer: I am not here to make friends, I am here to make money. I was trying to make a case, not have a balanced discussion. If I wanted to have a "balanced discussion", the title would have been: "Wow, AAPL has had a heckuva a run - now what". For what it is worth, every single time I get the kind of response that this article generated, I have hit the nail on the head: WFMI, TIE and this one. The ruder the people are, the wronger they appear to be. Go figure. I am not saying that I hit the nail on the head all of the time, but the belligerent Seeking Alpha readers, to me, seem to be great at representing the consensus and don't seem to look ahead. I think on this thread someone suggested I see a therapist based on that article and a clarification. I always thought that the people who live on fantasy island were the ones who needed a shrink!

Hey, best of luck in your investing. Feel free to email me if you have any "novice" questions, as I am always excited to help new investors in any way that I can.

[AC]

Thanks, I just may take you up on that.

I chuckled a bit when I just read what I said on the whole "balanced discussion" and looked back over some of the responses. I don't think any title would have helped the responses.

[Lisa]

Alan, this was a phenomenally good call. You published this article just as AAPL was peaking at $200 per share; a couple of months later it was at $120.

The Apple-faithful who left the knee-jerk-reaction comments need to ask themselves this question: Do you understand the difference between Apple the company and AAPL the stock? Do you understand that stocks price in future expectations?

It's evident from the comments that they don't.

You do. Congratulations.

[Alan Brochstein]

Thanks, Lisa. People often ask me why I write. I have several reasons. First, I find that writing my ideas down is an extra step that helps solidify my own investment process. In this case, while I was never short any of the three stocks in this article, I was extremely short the market in general at the time. I believed, among other things, that the tax-deferred selling I anticipated would hurt the overall market. When I get the type of response that I received on this article, I become even more encouraged by my thinking. The same thing happened for TIE and WFMI. Second, I hope to introduce myself to potential clients (investment advisors). Finally, I believe that I am creating a historical record by which others can ultimately judge my own judgment. I have had a couple of lousy calls, but if one were to review the contributions I have made over the past 15 months, one would see, on balance, that I have proven my ability as an analyst to understand, as you say, the difference between the company and the stock.

I am about to launch a subscription business aimed at do-it-yourself investors - hopefully calls like the one that you have highlighted will help convince these individual investors to give the service a shot.

[Le French]

To quote myself:

"""&quo...
This guy should stop drawing meaningless isocost lines and start considering deferred sales revenue from the Iphone and the brand value of Apple. What a dumbass! Apple is a symbol for students and I'm so surprise how people don't understand that we will all graduate in 2/3 and guess what? We are loyal customers...

Recommendation: Apple is undervalued
Sentiment: Strong Buy Long-Term

"""&quo...

I do apologize for calling you a "dumbass".
As far as I am concerned I don't have any emotionnal connection with Apple whatsoever, as I only own an small apple shuffle and I sold my stock 2 months ago when the stock got back on its two feets.

Considering the current macroeconomic environment, if you are a trader, I would stay on the sideline and buy commodity stocks and wait another 6 months after the market correct a good 15% to get back into this stock.

From what I see on my campus, people don't think you're hip if you don't have an apple laptop, so peer pressure is strong for all those students to get one, and the number of Apple consumers keep rising.

Good luck in timing the market.