The Monday Morning Quarterback

by: Brian Nichols

Last week's "Monday Morning Quarterback" produced great conversations along with intriguing questions. I will continue to take questions through Seeking Alpha,, or through Twitter, in the week prior to future postings. This week's questions cover broad topics; I hope you enjoy, learn and, at the end, feel free to chime in.

Cob12 from asks, "With pending home sales and new home sales on the rise, and consumer confidence ticking higher, do you think it is time to buy Home Depot (NYSE:HD)?"

I think most reasonable investors would agree that psychology is what drives the short-term direction of a stock, while fundamentals are what drive its long-term trend. With that being said, yes the stock could trade higher short term. But over the next 12-16 months, I think it's setting itself up for a McDonald's (NYSE:MCD) like trend (back in 2012) due to its valuation. Allow me to explain:

Consider the fact that from January 2010 till January 2012 shares of McDonald's ticked higher by more than 60%, meanwhile earnings grew by just 10% during that period, which means that the company's valuation/fundamentals also ticked higher. The stock traded with a P/E ratio of just 16 in 2010, yet more than 20 towards the end of 2011. The problem was that growth did not justify the valuation, nor does it with Home Depot.

McDonald's saw a pullback last year because it was too expensive compared to growth, as a company growing at an annualized rate of less than 5% should not trade at 20 times earnings. Home Depot is projecting growth of just 2% in 2013 and has near tapped its margins, yet is trading at 24 times earnings. This is simply too expensive. As a rule of thumb, if GDP growth is 3% and the S&P 500 trades at 15 times earnings, then The Home Depot with projected growth of 2% should trade below 15 times earnings. Think about it, does it make sense that a company with 2% growth would trade at 24 times earnings when our broader market trades at a much lower multiple with 50% more growth? It doesn't make sense. As a result, I'd expect a significant pullback from the stock, much like McDonald's, because it's simply too expensive compared to growth.

Seeking Alpha user ChinaBuyer asks, "How long are you on Alcatel-Lucent (ALU)? Do you swing trade the stock or have a price in mind in the next year or so?"

I do not swing trade and I do have an idea of what I think the stock is worth. The key is "IF" the company executes on its plan. IF the company can eliminate $5 billion of its business, IF it uses the money earned to strengthen its balance sheet, IF it continues to grow in emerging segments, and IF it can reach profit margins of 2.50% in 2014, then I think it's worth the same 1-2 price/sales ratio or 15-25 times earnings found in other stocks in its space. To better explain, take a look at the chart below to see how telecom communications equipment companies compare:


Ericsson (NASDAQ:ERIC)


Juniper (NYSE:JNPR)

Market Cap (billions)





Revenue (billions)










Operating Margins





Free Cash Flow

$597.83 million

$2.8 billion

$8.28 billion

$87.88 billion

As you can see, Alcatel-Lucent is greatly cheaper than any of the other stocks in its industry. The stock is oversold and it is obvious that the market is rewarding margins in this particular space. The key will be whether new leadership continues to execute on the plan of reducing assets and divesting its unprofitable businesses. Like I said, the goal should be to eliminate $5 billion of its unprofitable segments; we already know that up to $1 billion from its submarine segment has potential buyers. Then, compared to the industry (which is key), if Alcatel can bring its 2014 operating margin guidance to 2-3% then a 1.0 price/sales ratio is highly likely (this is based on the stock being oversold and its outlook being negative). The company then has growing business in the Americas and in China with companies such as AT&T (NYSE:T) and China Mobile (NYSE:CHL) that will allow it to grow its remaining $13.5 billion business. With all things in consideration, I have a price target of $6 for December 2014, which is the time that I think it will take to execute on the company's restructure plan and to see a measureable outcome. However, 2013 should be a big year as the company reduces its assets, improves its balance sheet, and investors continue to speculate and look towards the future. I think Alcatel-Lucent could reach $2.50 and would still be undervalued compared to the industry. But keep in mind, this is a high-risk investment; there are a lot of "ifs" in the outlook.

Next question comes by way of Twitter, "Are you still bullish about Apple (NASDAQ:AAPL) or are the best days behind us?"

First off, I don't think the best days are behind Apple . The company has a great ecosystem and is still expecting sales growth of an estimated 20% in 2013. It trades at just 8.50 times next year's earnings (7.00 minus cash) and has a combination of product launches and potential partnerships that could serve as catalysts.

The problem with Apple isn't necessarily the fundamentals, but rather public perception. A few weeks ago, I published an article on my McGraw-Hill column entitled, "How Should You Invest in Apple?" The idea was to help investors avoid making mental mistakes when investing in the company, such as chasing gains when it pops or panicking when it falls. The idea is that investors are in such a hurry to find the bottom and capitalize on the short-term pops that they are not taking the time to fully assess the value of the stock, which is obvious. Take a look at how Apple stacks up to the other tech leaders and you'll see the value.



Microsoft (NASDAQ:MSFT)

International Business Machines (NYSE:IBM)

Market Cap (billions)










Forward P/E ratio





Operating Margin





2013 Expected Growth (top line)





As you can see, Apple is the cheapest of the tech giants, and is also one of the fastest growing of the companies. Yet despite this fact, the stock hit a new 52-week low on Friday, and we continue to see a shift in capital from Apple to other tech names such as Google. The performance is hard to explain, but as I explained in my McGraw-Hill column, accumulate shares of the cheap stock over a period of time to both keep your nerves under control and also to purchase at the best possible price.

With Apple being so volatile it's hard to buy, hold, and maintain your composure, especially with the markets trading higher. But according to the chart above, the stock is cheap, very cheap, and history tells us that if a company does well its stock will usually follow. The stock has lost 38% of its value since all-time highs, so I think it is a good time to buy, although I suggest either acquiring over a period of time with small purchases or, if you're able, buy it and forget it for the next eight months.

Seeking Alpha user jjnagoings asks, "If you were starting again at $10,000 how would that portfolio look?"

The question above is referring to a series I wrote a few weeks ago entitled "Diversifying Your Portfolio," and in it I looked at the best ways to diversify a portfolio according to the size of the portfolio. The idea of the series is that someone with $10,000 would not invest like someone with $100,000, and the former would be willing to take on more risk in order to return more of a reward. User jjnagoings wants to know what I would buy if I had to start over with $10,000 in this current market.

If I had to start all over I would first choose a small cap secular stock with room to grow, such as Correction Corporation of America (NYSE:CXW). The stock is fairly valued with a price/sales of 2.10 and a forward P/E ratio of 18.45. This is a stock that has performed well over a long period of time and recently increased its dividend by 165%, paying a forward yield of 5.73%. The fact of the matter is that people are going to "vacation" in prison regardless of the market, and with such a high yield it could see significant appreciation. I would use a stock such as this as the cornerstone of a smaller portfolio. It's an investment that should be safe, but could also return gains that outperform the market.

In addition to the one secular investment, I'd add one undervalued cyclical stock such as Ford (NYSE:F) or Apple, stocks with strong growth, good dividends, and are undervalued. Finally, I'd add either a small or large cap speculative stock such as XPO Logistics (NYSEMKT:XPO) or American International Group (NYSE:AIG). My personal favorite is XPO Logistics, which is also the largest holding in my portfolio, a company that is growing by 150% year-over-year and is trading at just 0.60 times future sales. Each stock in this portfolio provides some security with the potential for very large gains, which is what you seek in a $10,000 portfolio. user JasonHryn asks, "What are your thoughts on Best Buy?'

I've been overwhelmed with questions regarding Best Buy (NYSE:BBY) over the last few months. In part because I was so negative last year, but also because I have become very positive in the last five-seven weeks.

I think the best way to look at Best Buy is both in 2012 and now in 2013. In 2012 the business was being used as a display for consumers to get their hands on products and talk to a knowledgeable staff about those products. Those same consumers could then go to Amazon, eBay, or and find the products much cheaper. In 2012 (and before) these online retailers were much more attractive for two reasons: 1) they had cheaper prices due to less costs and 2) consumers were not paying taxes and sometimes shipping fees to order products. Therefore, if a product was $200 at Best Buy, it could be found for a 2%-5% discount on Amazon plus 5%-10% sales tax discount (6% for me). As a result, the consumer saved $20-$30 by ordering products online, making Best Buy a declining company and a bad investment.

In 2013 it looks as though some of these issues could change. Back in February, Reuters reported that a modified version of the sales tax bill would be finalized and sent to President Obama sometime this year. If approved, consumers would have to pay sales tax on purchases made online. This could be huge for Best Buy, as Internet sales have risen from 1.6% to more than 5% in the last decade alone. In the third quarter (2012), e-commerce sales totaled $57 billion, showing a clear shift towards the online retailer.

The new legislation is a direct benefit to Best Buy, as it's estimated that 20% of consumers who purchase an electronics product from Amazon first view it at a store such as Best Buy. In the past this would make sense due to the savings, but if consumers no longer save the 5%-10% on sales tax then it may be more beneficial for them to purchase the product in-store with a sales associate pushing them in the right direction. Of course Amazon still might have slightly lower prices, and Best Buy will still have to deal with the 10.86% of consumers who cross-shop with Amazon online. However, this might close the gap and create more sales for Best Buy. Hence, despite Best Buy's 43% YTD gain I still think it's an intriguing buy. BBY is the cheapest on a price/sales basis in retail and pays a solid dividend. With that being said, I will close this discussion with a chart comparing Best Buy to other top retailers. You will see how cheap and how it might pay dividends to invest in Best Buy right now. Keep in mind, if legislation is passed (which I think it will) Best Buy is likely to see further sales growth; but based on current sales it is insanely cheap.

Best Buy

Wal-Mart (NYSE:WMT)

Target (NYSE:TGT)


Market Cap (billions)





Forward P/E










Revenue Growth (last quarter)





Operating Margins





Operating Cash Flow (billions)





Forward Yield






The "Monday Morning Quarterback" is a weekly response to those who send me emails, tweets, or leave comments throughout the previous week. These are my opinions; if you disagree or would like to add to the discussion then feel free in the comment section below. Otherwise, keep the questions coming and I'll try to include yours in next week's "Monday Morning Quarterback."

Disclosure: I am long AAPL, AIG, ALU, F, XPO. 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.