'Irrational Disappointment' From Tech Earnings Reports? (INTC, YHOO, AAPL, EBAY)

by: Yankee Group

By Carl Howe

We now have four technology firms -- Intel, Yahoo, Apple, and eBay -- who have reported terrific earnings this week and gotten hammered in the market afterward because of their outlooks. And what were those outlooks? They weren't that they were going to lose money. They were that they were expecting the economy to slow down a little and that they projected lower revenues for 2006.

This is what I call "irrational disappointment", in sharp contrast to Alan Greenspan's famous line about "irrational exuberance." And it is not because any of these companies are performing badly; in fact, all of these firms are growing both revenue and profits rapidly. But what is happening is that investors are saying "It's not enough" and selling. Yet I believe that most investors will wish they owned those stocks by the time summer rolls around and have to buy them back again, probably at higher prices.

How should an investor avoid the trap of irrational disappointment? I think the problem is that it is easy to focus on risks to the exclusion of factoring in possible benefits. I imagine in my mind a balance scale like the one held by the famous paintings of Blind Justice you see in courthouses. On one side of the scale I mentally stack up risk factors like uncertain economic times, product transitions, and supply issues. On the other side of the scale I imagine putting rewards like income from new products, revenue from tapping new customers, and higher stock prices.

When I think about my balance scale in all of the four stocks above, the side that is most weighed down is the one with rewards. All of these companies are likely to grow their businesses substantially over the next six to twelve months, regardless of what the economy looks like. All of them have serious money in the bank to cushion them should things turn sour. And all of them have good marketing plans in place, which is a huge differentiator in the technology business. Yes, analysts may not think these stocks are doing as well as they could. But don't let irrational disappointment keep you from weighing the rewards that are possible as well.

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