October did not turn out to be a good month for some of the largest technology shares this year. Apple, Inc. (AAPL) is down 9.5% month-to-date from end of September to October 26, while International Business Machines (IBM) is down 6.8%, Microsoft (MSFT) is down 5.2%, Google (GOOG) is down 10.5% and Intel (INTC) is down 3.5%. Will these shares continue their lackluster performance into January 2013, or is it time to buy for a year-end rally coupled with a bullish January effect?
This year's poor October performance was primarily driven by disappointing earning results. Meanwhile, during the past 10 years, the period from November 1 to January 31 has proven to be generally good for Apple, IBM and Microsoft, while in the case of Intel and Google (although Google went public August 19, 2004) this period was less generous.
|Number of up-years||6||6||7||3||4|
|Number of down-years||4||4||3||5||6|
Source: Values calculated from data provided by Yahoo Finance
On October 25, 2012, Apple reported Q4 2012 earnings (for the quarter ending September 2012) of $8.67 per share vs. consensus estimates of $8.75. We actually had earnings expectations of $8.70 per share. Although shares dropped by as much as $18.54 on an intraday basis the day after the results were released, Apple shares ultimately made back some of their lost ground, closing down $5.54 at $604.
On a percentage basis, actual results only missed consensus estimates by 0.9%, while they missed our own estimate by 0.3%. Given the performance of Apple shares during this year's month of October, where they have lost as much as 9.5%, we believe the earnings miss is negligible and there is a good possibility Apple shares may actually rally into January 2013.
From a cyclical perspective (as per above table), during the past 10 years, Apple shares rose on six occasions, while they fell on four occasions. (Past performance is no indication for future performance.) This includes the poor performance relating to the events of 2007 and 2008, which we believe are unlikely to be repeated.
It is also interesting to note that short interest for Apple has also been increasing, as discussed in our prior article published on October 25, 2012 "10 most shorted NASDAQ-100 stocks; is it time to buy?." Despite the increase, Apple's short ratio (short interest/float) has reached about 1.72%. Apple is still ranked 69 out of 100 in short ratio rankings, where a rank of 1 reflects the highest short ratio and 100 reflects the lowest short ratio. Nevertheless, the increase in the short ratio could provide some modest support to Apple shares in case of bearish news.
From a valuation perspective, Apple shares are quite attractive. With analysts' earning estimates of $50.46 per share for the year ending September 2013, and $59.05 for the year ending September 2014, Apple boasts a forward P/E of 11.97 and 10.23, respectively. Excluding Apple's cash of about $121.2 billion (cash, short-term and long-term investments), the P/E ratios drop to 9.4 and 8.04, respectively. Given the current interest rate environment, the P/E ratios are extremely attractive. Furthermore, as discussed in the article published October 24, 2012 "Apple can print its own money. Amazon too?", Apple boasts supportive liquidity ratios, with its current ratio standing at 1.6 as of June 2012. When coupled with Apple's long-term investments of over $89 billion, this current ratio is extremely healthy.
International Business Machines
On October 16, 2012, IBM reported Q3 2012 earnings (for the quarter ending September 2012) of $3.62 per share vs. consensus estimates of $3.61. Although the results were in-line with estimates, IBM reported revenues of $24.7 billion, substantially below consensus estimates of $25.4 billion. Following the release, IBM shares dropped from the previous day's close of $211 to $200.63.
From a cyclical perspective (as per above table), during the past 10 years IBM shares rose on six occasions between November and January, while they fell on four occasions. Furthermore, the average appreciation was about +7.2%, while the average depreciation was -2.4%.
The bullish case for IBM is not necessarily as strong as it may be for Apple for the next three months, as IBM witnessed substantial drop in its revenues during the quarter's last month of September. If this drop is an aberration, then IBM would be expected to fare well during the next three months. On the other hand, if the monthly drop is the start of a decline in IBM's business revenues, then there is a possibility of further disappointment for Q4 2012.
From a valuation perspective, IBM shares are also attractive. With analysts' earning estimates of $16.64 per share for the year ending December 2013, IBM has a forward P/E of 11.61. With Warren Buffett as an anchor investor, currently holding about 66.6 million shares or about 5.83% of outstanding shares, in addition to the current low interest rate environment, this P/E ratio is extremely attractive. Despite IBM's drop-off in business for the month of September, there is a good possibility for an appreciation in IBM shares due to cyclical factors, valuation, and an environment of Federal Reserve-driven expansion in P/E multiples.
On October 18, 2012, Microsoft reported Q1 2013 earnings (for the quarter ending September 2012) of $0.53 per share vs. consensus estimates of $0.56. Following the miss, Microsoft shares dropped by 5.1% from $29.50 on October 18 to $28 on October 20.
From a cyclical perspective (as per above table), during the past 10 years Microsoft shares rose on seven occasions between November and January, while they fell on three occasions. Furthermore, the average appreciation was about +6.7% while the average depreciation was -15.1%. Microsoft suffered a substantial setback in 2008, dropping by 22.9%, more than the other four technology companies examined in this article.
During the next three months, Microsoft's performance will be heavily impacted by the success of Windows 8 as well as the launch of several mobile devices using Microsoft's operating system, such as Nokia Lumia 920. Meanwhile, from a valuation perspective, Microsoft shares are also attractive. With analysts' earning estimates of $2.90 per share for the year ending June 2013, and $3.24 for the year ending June 2014, Microsoft boasts forward P/E ratios of 9.7 and 9.3 respectively. Again, in the current low interest rate environment, the P/E ratio is extremely attractive.
Despite increased competition from Apple devices, we believe that the combination of 1) attractive valuations, 2) new product cycle, and 3) positive stock performance cyclical factors, will likely support appreciation in Microsoft's share price during the next three months. Although many are concerned that the PC may be dying, hence potentially having a major negative impact on Microsoft, we do not believe that the PC is actually going to disappear anytime soon, despite increased competition from tablets.
On October 18, 2012, Google reported quarterly earnings for the quarter ending September 2012 of $9.03 per share, substantially below the consensus estimates of $10.65. Following the release, which actually came prematurely during the trading session, shares dropped by 7.9% from the previous day's close of $755 to $695.
Google's revenues are currently being negatively impacted by its inability to fully monetize on consumers' migration to mobile smartphone devices. We believe this challenge will continue, as discussed in our article published on October 17, 2012, "Google's search lead can become Apple's advantage in 5 years" We had actually predicted this challenge the day before the latest earnings were released.
From a cyclical perspective (as per above table), since going public in 2004, Google shares dropped on five occasions, while they rose only on three occasions for the period from November to January. Google shares dropped by an average of 6.3%, while they rose by an average of 8%. It is very evident that from a cyclical perspective, the next three months may not be in favor of Google shares.
From a valuation perspective, Google shares seem pricey relative to other technology shares, especially given recent uncertainty for advertisement revenue growth potential. With analysts' earning estimates of $39.90 per share for the year ending December 2012, and $46.39 for the year ending December 2013, Google boasts a forward P/E of 16.92 and 14.55, respectively.
Given negative stock price cyclical factors, uncertainty about future advertisement revenue growth, as well as unattractive valuations, we believe the next three months may not favor Google shares.
On October 16, 2012, Intel reported Q3 2012 earnings (for the quarter ending September 2012) of $0.58 per share vs. consensus estimates of $0.50. Despite beating market consensus estimates by 8 cents, Intel shares remained on the defensive as such estimates had previously been lowered several times following earnings warnings by the company. Meanwhile, the outlook for the future also remained uncertain.
From a cyclical perspective (as per above table) during the past 10 years Intel shares rose on four occasions, while they fell on six occasions. Intel shares dropped an average of 11.2%, while they rose by an average of 5%.
From a valuation perspective, Intel shares are somewhat attractive, although 2013 analysts' earnings expectations are expected to come in below 2012. With analysts' earning estimates of $2.11 per share for the year ending December 2012, and $1.97 for the year ending December 2013, Intel has respective P/E ratios of 10.4 and 11.1.
Given negative stock price cyclical factors as well as uncertainty about the future business environment for Intel's products, Intel's shares may not seem as attractive as some of the previously discussed alternatives during the next three months. However, from a longer term perspective, current valuations do seem attractive for Intel.
Despite weakness during the month of October for most technology shares, shares of Apple, IBM and Microsoft could potentially appreciate during the next three months. Meanwhile, the odds are not currently in favor of Google given its declining advertising revenues and its poor cyclical performance. Intel shares also seem less attractive for the next three months, although their valuation may present a good long-term buying opportunity.
Additional disclosure: I may also initiate short positions in Google and/or Intel in the next 72 hours.