Most investors have been able to make money from broad market investments over the past few years. This is no longer the case, in my opinion. Going forward, this will be a stock pickers market. Valuations and trading ranges need to be closely identified in every instance. There will be some diamonds in the rough, and there will be some clear avoids. The stocks below have recently reported earnings, and some of them offer signals in terms of valuation and stock performance going forward. I have illustrated the prospects for each one below.
Yahoo! (YHOO): First we will talk about valuation, and then let's talk about the trading analysis of the stock itself. Yahoo trades with a PE multiple of 54.97. However, the stock is only expected to grow at 24.99% over the next five years. Recent earnings results showed that users grew by 19% during the recent quarter, but revenues only grew by 9%. In fact, there was no growth in earnings per share at all. Instead, there was a $0.1 decline in earnings per share on a year over year comparison. Another way of looking at this: if Yahoo's stock price stayed exactly where it is now, and revenues grew just like they did in this quarter, Yahoo's stock price, wouldn't go anywhere for six years, while earnings caught up with the multiple. Yahoo looks like an avoid on a valuation basis. Unless something dramatically changes at the company, and granted Panama could be a catalyst to that change, Yahoo does not appear poised to be going anywhere soon, other than down. From a valuation standpoint Yahoo looks expensive, and the prospects for future growth are questionable. Traders need to be very cautious with this stock.
Now, from a technical standpoint, Yahoo looks bearish as well, but there is one saving grace. Yahoo had recently been approaching a level of longer-term resistance, but the stock turned abruptly lower before that test occurred; this is the first red flag. This is a very bearish sign, but the stock is not yet poised to decline all the way to longer-term support; that will only be confirmed if a second bearish indicator exists. In order to decline to longer-term support the stock must first break below longer-term intra-channel support, and it has not yet done that. If Yahoo breaks below longer-term intra-channel support after having failed to test longer-term resistance then the stock will have two compound bearish trading signals down and the stock almost surely will continue to decline over time. Anyone interested in Yahoo from this point forward should pay close attention to longer-term intra-channel support, because that will be your inflection point, and an indicator of direction going forward.
IBM (NYSE:IBM): IBM has always been a darling of Wall Street. It's a multinational, the stock has been around forever, and the company is relatively reliable; Wall Street is full of traditions. If you have ever visited Wall Street you know this quite well. Traditions and old ways are high values to many of the Ivy Leaguers on Wall Street. I'm not criticizing tradition, but in this case, the darling of Wall Street may be in question. IBM trades at about a 50% premium to its longer term expected growth rate. IBM is expected to grow at 10.5% every year for the next five years. However the stock trades with a price earnings multiple of 15.52. the premium valuation is probably based on the company's multinational exposure, and Wall Street's tradition. However, in the most recent quarter the company did not even keep up with the longer-term projections. Revenues only increased by 6.6%, and earnings only grew by 8%. If you are looking for value, you're not going to find it in IBM.
From a technical standpoint, IBM is floundering in the upper range of a longer-term channel. the stock had come close to a cast of longer-term resistance, and it has also come close to a test of intra channel support, but as of now the stock has failed to test either resistance or intra-channel support officially. Instead it has been floundering in the upper part of this channel. Although we provide analysis for more active trading strategies in our report too, this commentary is offered with longer-term trades in mind.
Intel (NASDAQ:INTC): Valuation is a major concern for Intel too. The stock is expected to grow by 13.31% over the next five years, but the stock trades with the price earnings multiple of 24.88. However, in the last quarter revenues actually fell by 1% and earnings actually declined by one penny. Based on valuation alone, Intel does not look fairly valued. Instead, it looks expensive. Blame it on Applied Micro Devices (NASDAQ:AMD), or anything else, but recognize that Intel is not showing us the money.
From a technical standpoint, the prospects for Intel to increase from current levels still seem reasonable. The stock had been in the process of increasing to longer-term resistance (it didn't do that), but subsequently it turned lower and tested intra-channel support perfectly and then reversed back towards resistance. This successful test of intra-channel support is a positive sign, and it suggests that the stock is likely to continue to increase to longer-term resistance over time; so long as it holds we should expect a test of resistance.
Linear Technologies (NASDAQ:LLTC): Linear Technologies trades at an more even multiple than the companies listed above, but there are still concerns. The company is expected to grow at 17.97% every year for the next five years. The stock currently trades at a PE of 25.1. This is much closer to being on par than the previous companies we have reviewed, however, there is still a clear premium. In addition, revenues fell by 8.6% and earnings per share were down by 11% in the most recent earnings report. In this case, the concern is that revenues are declining in the face of a premium multiple.
But from a technical standpoint, the light is a different color; Linear Technologies has broken out. This may come as a surprise given the poor earnings release, but technically, the stock has broken above longer-term resistance. This should now be considered an inflection level. Longer-term resistance has now been converted into support. If this level remains in tact we should expect linear technologies to continue to move higher. However, if converted support breaks lower instead, the stock is likely to fall into the trading range from which it has recently broken out.
eBay (NASDAQ:EBAY): EBay looks much more compelling. In my review of Yahoo above, I demonstrated that Yahoo could stay at the same price as it is now and six years later it would finally be trading at a fair value to its multiple. The case of eBay is a little different. eBay could do that in a year. Sure, a PE of 43.61 is high, but the company has been demonstrating that it can show us the money. Over the next five years Wall Street expects eBay to grow at 21.28% every year. The most recent quarter showed that revenues increased by 27.3% and earnings increased by 59%. If eBay can keep it up, the valuations will only continue to rise.
From a technical standpoint, eBay is in the process of increasing to test longer-term resistance, and we should expect that test relatively soon. Once longer-term resistance is tested we expect the stock to stall, turn lower and test longer-term support again with an established channel.
Novellus (NASDAQ:NVLS-OLD): Although revenues are lagging a little bit, there seems to be light at the end of the tunnel for Novellus. Wall Street expects Novellus to grow at 17.78% every year for the next five years. The stock trades with a PE of 21.78, not too far way. Earnings-per-share also increased by 118% in the most recent quarter. However, revenues only grew by 9.5%. Clearly there are some positives and negatives to be taken from this valuation analysis. No one expects earnings to grow at this level for any sustained period of time, but keeping up with the projected growth rate is reasonable given the recent performance. Although Novellus is trading with a slight premium, it does not appear to be dramatically overvalued.
The only red flag for Novellus is that the stock has most recently tested longer-term resistance. In normal oscillation patterns, we expect stocks to trade from resistance to support within normal trading channels. We also expect stocks to bounce when intra channel levels of support are tested. In this case, Novellus successfully tested longer-term resistance; then the stock declined perfectly to test intra channel support, and it bounced, just like we would expect in normal patterns. Now, from here, intra-channel support should be used as our inflection level. If this level continues to hold than a test of resistance is likely to occur again eventually. But because resistance has already been tested, the chart pattern tells us that a break of intra-channel support is most likely, and then the stock is likely to continue to decline and test longer-term support over time
Gilead (NASDAQ:GILD): From a valuation standpoint, my favorite of this group has to be Gilead. Wall Street expects Gilead to grow by 18.21% every year for the next five years. Based on current price earnings multiples the stock trades at 24 times earnings. However, in the recent quarter, revenues grew by 48.7% and earnings grew by 55%. GILD is far outpacing the projected growth rates that Wall Street has given the stock. Upgrades are almost sure to come. GILD looks like a compelling value.
With that understood, GILD is in the process of increasing to a test of longer-term resistance. If this resistance level holds we expect the stock to turn lower and test longer-term supported again. However, given the bullishness of the recent report, and the comparative valuations, a break above resistance is very possible. If resistance breaks higher aggressive increases are likely to follow over time. Make sure that you pay close attention to because that will be the determining factor in direction going forward. If the stock holds below resistance, expect a decline. But if it breaks higher expect aggressive increases instead.