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Portfolio Management 101 is led by CFA Charterholders with combined investment experience of over 25 years. The articles written by PM101 are intended to be informative and may contain opinions on the soundness of particular investments but should not be considered a recommendation for any... More
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  • Apple Has A Tell

    Want to know what Apple's revenues are going to be next quarter? If you believe in the power of statistics and how carefully analyzed statistical data can result in surprisingly relevant forecasts, read on. If you don't, then you might want to go on to the next article.

    Statistics are backward looking so they cannot predict the future. But like a dark cloud in the sky oftentimes leads to rain, we can glean quite a bit of information from looking at data so long as it is done correctly. In other words, so long as the data is not forced to fit the conclusion you are trying to reach, data can be quite powerful.

    We can also accept that a company's capital expenditures lead to future revenues, right? If this relationship does not hold then the company just won't be around very long. In the case of Apple (NASDAQ:AAPL), which has been around long enough, there is a very strong relationship between capital expenditures and revenues. However, capital expenditures don't translate into revenues immediately. For some companies, investments can take months or years before they generate revenue. An oil refinery comes to mind. For others, the results may be evident much sooner.

    You shouldn't be surprised then that Apple is one such company. In fact, my analysis shows that the level of capex in any given quarter is directly responsible for the following quarter's revenue. Now we can't take that at face value and assume that when Apple spends a lot on CAPEX, revenues increase. But we can reasonably assume that Apple increases CAPEX in the quarters leading up to a new product launch which should create a spike in revenue. In fact, the correlation of quarterly CAPEX spending on subsequent quarter's revenues is 94%. For those of you that don't remember what that means from your college stats class, it means that there is a very high relationship between the two. It doesn't necessarily mean there is a direct relationship, but statistically, anyway, CAPEX spending is a leading indicator of revenues.

    In the last 4 years, in particular, CAPEX has spiked leading up to a new iPhone launch, which drove revenues higher in the subsequent quarter.

    With the launch of the new iPhone 6S and 6S plus this past quarter, it's a given that revenues will be higher next quarter. But how much higher? According to Bloomberg consensus, revenues for Q1 2016, which ends on December 31st, 2015, will be over $77 billion.

    However, using statistical analysis, we can guesstimate a forecast using the level of CAPEX spent in the previous quarter. The chart above shows CAPEX spend of $3.6 billion. The last time Apple had CAPEX spend higher than $3.5 billion was in Q4 2014 when the iPhone 6 was launched. Revenues in the subsequent quarter were $74 billion. Using the slope and intercept formula from the last 40 quarters of data, I estimate 1Q 2016 revenues to be approximately $68 billion. Give or take a 5% variance and revenues should be in the $64 to $71 billion range.

    From there we can apply estimated margins to arrive at an estimate for earnings. If I just use last quarter's net margin of 22% and apply it to revenues of $68 billion, earnings should be around $14.9 billion. However, I believe a more reasonable net margin will be 24%, which is more comparable to the net margin during 1Q 2015, when the previous iPhone was launched. Using 24% as a net margin leads to EPS of $16.3 billion or $2.92 per share.

    If you're wondering whether this is too simple, ask yourself what analysts do to develop their own forecasts. They might go into more detail, perhaps even trying to predict the number of phones sold, the average price per phone, etc. and then applying estimates to each line item to come up with a bottom line estimate. If you ask me, that's even harder to do and can be just as inaccurate. The Bloomberg consensus estimate is $3.26 and range from $2.94 to $3.47 - My estimate would be the lowest among the group. Let's see which one is closer.

    Sources: PM101, Bloomberg, Apple website

    Tags: AAPL
    Nov 04 2:19 PM | Link | 5 Comments
  • Google, Facebook, And Tesla Hit All Time Highs Today. Watch For Signs Of A Pullback

    Google (NASDAQ:GOOG), Facebook (NASDAQ:FB), and Tesla (NASDAQ:TSLA) hit all-time highs today. Investors who've held these stocks over the past year have done very well. Tesla had a total return of over 500%, while Facebook has had a total return of 161% over the last 12 months. And finally, Google had a 'modest' return of 52% over the same period.

    Over the long-run, I think all three of these stocks are winners. But there are ways to enhance your return slightly in the short-term as these stocks take a breather, and quite possibly, can pullback a few percentage points.

    Google hasn't quite reached oversold levels, but divergence on the MACD may be a lead indicator of a pending pullback. (Divergence is when an indicator, such as MACD, in this case, begins to show a divergent trend from the trend of the price.) As you can see on the chart below, there is a downward sloping trend on the MACD line while price has continued to rise.

    An aggressive technical trader may be shorting the position right now, but if you have the stock and think its a long-term hold, you may want to consider sell an in-the-money call to collect the premium. If the stock does pull back over that period and falls below the strike price, you keep the premium and the stock. Only if the stock stays above the strike price will you have to 'give it up', and if this were to occur, you can always buy it back at market price.

    (click to enlarge)

    Facebook, on the other hand, does look like it is oversold. The RSI has broken above 70. We don't see an divergence on Facebook, but sometimes an oversold condition can lead to a sell off as well.

    (click to enlarge)

    Tesla also looks like it is oversold. The last time it reached an RSI of 70 was back in mid-January and the stock only pulled back a few days before it kept going on its upward climb. Can this pullback be worse?

    (click to enlarge)

    All three stocks are on an upward trend and only 1 technical indicator is showing a possible pullback. Investors who hold the stock should watch for additional technical indicators for a possible correction. It is very difficult to time the market but lightening up after such an incredible price increase wouldn't be a bad idea. There should be another opportunity to enter.

    On the other hand, if you are looking to invest in any of these right now, I see how some of these technical indicators play out over the next couple of weeks. I lightened up on my Google position in early January and have been looking for an opportunity to jump back in. Having missed the late January correction, I'm thinking that this may be it.

    Good luck investors.

    Disclosure: I am long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Feb 25 2:56 AM | Link | Comment!
  • 5 Undervalued Stocks With ROE Above 20%

    One way of identifying when a stock is undervalued is to look at the variety of price multiples available and compare it to industry peers as well as to it's own historical average. But there is no indication of a company's prospects by looking only at the price multiple.

    Another way to evaluate whether a company is undervalued is to look at the PEG ratio. The PEG ratio is a relative measure of valuation compared to the future earnings forecast of the company. While future earnings may change and analysts are often inaccurate, a PEG ratio of less than 1 indicates that the PE multiple of the company's current stock is below the expected earnings growth for the company over the next year. This may be considered an undervalued company. A PEG ratio of greater than 1 indicates that the current PE is greater than the expected earnings growth for the company over the next year.

    With this in mind we looked for companies with PEG ratios below 1 and also complemented that criterion with a return on equity of more than 20%. In addition, we wanted to identify those companies with positive analyst ratings so we evaluated only those companies with an average of an overweight by wall street analysts.

    Return on Equity - Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. It can be broken down into three components, which are all captured by the ROE metric. They are operational efficiency, asset management, and financial leverage. For example, Net Income/Sales is the net profit margin, which indicates the company's operational efficiency; Assets/Equity is called financial leverage, and Sales/Assets is the asset turnover component. Together they measure how well a company is run, and by multiplying all three of these components, we arrive at ROE.

    Take a look at the following 5 stocks and determine for yourself if they are attractive additions to your own portfolio:

    1. Intel (NASDAQ:INTC)

    Intel is one of the largest chipmakers in the world, and while they are dominant in the desktop business, they supply manufacturers of mobile phones, tablets, and other electronic devices as well.

    Intel lowered their Q3 guidance this week so while it's inclusion on this list may raise some eyebrows, we included it anyway because of the heavy change in insider ownership over the previous 6 months. It will be interesting to see how the stock reacts from now until the end of the year as we better understand why insiders may have been bullish on the stock. Perhaps, and this is just a guess, insiders still think the stock is undervalued despite the lowered guidance.

    (click to enlarge)

    2. Ford (NYSE:F)

    Ford Motor Company (NASDAQ:FORD) is a producer of cars and trucks. If you had heard Jennifer Granholm's speech during the Democratic National Convention, you'd be buying up Ford stock all day long. Ford has come a long way since it's near collapse a few years ago. And while revenue isn't quite back where it was in 2007, it has shown respectable increases in revenues from 2009 to 2011 in a very tough economic environment. As economic conditions improve, look for Ford to continue to do well.

    (click to enlarge)

    3. Tempur-Pedic International Inc. (NYSE:TPX)

    Tempur-Pedic International Inc. is a manufacturer, marketer and distributor of premium mattresses and pillows, which it sells in approximately 80 countries under the TEMPUR and Tempur-Pedic brands.

    This stock is down 39% YTD, but has recovered dramatically in the last 3 months. No wonder insiders are buying it up. TPX reported worse than expected numbers earlier this year and the stock tumbled on the news. Now, housing seems to be on the mend, and when people buy homes, they typically replace their mattresses. If the trend continues, TPX may benefit.

    (click to enlarge)

    4. U.S. Airways (LCC)

    US Airways Group, Inc. (US Airways Group) is a holding company whose primary business activity is the operation of a network air carrier through its wholly owned subsidiaries, US Airways, Piedmont Airlines, Inc. (Piedmont), PSA Airlines, Inc. (NYSE:PSA), Material Services Company, Inc. (NYSEARCA:MSC) and Airways Assurance Limited (NASDAQ:AAL).

    This may also be another comeback story in the making. After going nowhere for about 4 years, LCC seems to be making a move over the last month. It has gone from $10-$12 in a matter of weeks and with insiders buying the stock undervalued, it may be a good opportunity to invest.

    (click to enlarge)

    5. Western Union Company (NYSE:WU)

    The Western Union Company (Western Union) is engaged in money movement and payment services. Need to send money fast? That would be Western Union.

    Despite increased competition from Paypal and American Express, billionaire Leon Cooperman continues to buy shares. The stock has been so beaten down that any growth at all would make this a great investment. And the company had 4% revenue growth and 3% income growth compared to comparable periods in 2011.

    (click to enlarge)

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    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Sep 11 10:59 PM | Link | Comment!
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