Don't Buy What You Can't Value

Includes: AAPL, MSFT, PALM
by: AAII

The financial markets always seem to do something that causes me to shake my head and chuckle. This week it involved smart phone maker Palm (PALM).

Shares of the stock jumped on reports that the company has put itself up for sale and is working with investment banks to find a buyer. PALM rose even higher yesterday after a new regulatory filing revealed that Harbinger Capital acquired a 9.48% stake in the company.

The problem is that PALM is on the verge of bankruptcy. It is burning through cash and has more debt than assets, meaning that it has negative book value. Its phones aren’t selling very well either. In fact, during its last conference call, the company admitted that resellers’ inventories of Palm phones were too high. These are not the types of things you want to see in an investment.

So, why are people buying shares? There is an assumption that the company’s smart phone patents have value. I own a Palm Pre. It’s a good phone, but it is not without problems. In fact, I think the software updates have made the phone worse, not better. Plus, I am on my second Pre in less than a year because the keyboard on the first one broke.

The biggest question, however, is competition. Apple’s (NASDAQ:AAPL) next generation iPhone will do most of the things Palm’s Pre can do, and probably better. Google’s smart phone technology is arguably just as good. (In fact, I use Google to sync my contacts and calendar between my phone and both my work and home PCs.) Microsoft (NASDAQ:MSFT) is about to unveil a new mobile operating phone system of its own. Therefore, Palm faces a steep uphill battle even if it survives.

Given that Palm does have relationships with the mobile phone companies and does have certain patents, there might be underlying value, but how much is very hard to determine. In fact, I would guess that 99% of the people buying Palm stock this week don’t have any idea. I know that I don’t, which is partially why I refuse to buy the stock.

When it comes to investing, one should never buy what one cannot value. It’s a rule that has evidently been lost on many investors who chose momentum over true analysis this week.


First-quarter earnings season will hit full stride next week with more than 100 S&P 500 members reporting. Financial companies will be in the spotlight with Citigroup (NYSE:C) on Monday, Goldman Sachs (NYSE:GS) on Tuesday, Wells Fargo (NYSE:WFC) on Wednesday, Capital One (NYSE:COF) on Thursday and many of their competitors reporting.

The week will belong to large-cap and mega-cap companies with several Dow components releasing results. International Business Machines (NYSE:IBM) is scheduled for Monday. Coca-Cola (NYSE:KO) and Johnson & Johnson (NYSE:JNJ) will report on Tuesday. Wednesday features United Technologies (NYSE:UTX). American Express (NYSE:AXP), Microsoft (MSFT) and Verizon (NYSE:VZ) report on Thursday. Travelers (NYSE:TRV) ends the week with its report on Friday.

Other notables will include Apple (AAPL) on Tuesday and (NASDAQ:AMZN) on Thursday.

The economic calendar does not provide much competition for the headlines, though there will be a few reports of interest. The Conference Board will release its latest leading indicators index on Monday. March producer prices (PPI) and existing home sales data will be published on Thursday. March durable goods orders and new home sales numbers are slotted for Friday.

No Fed officials are scheduled to make public speeches. The next Fed meeting will be held at the end of the month.