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Let Off The Leash

|Includes: AAPL, APKT,, Inc. (CRM), FFIV

Almost every financial book I've read the past two years has suggested that we are in for rough sledding in regards to where the economy is heading for the next decade. Some of these publications were written by academics, but for the most part, they have been penned by investors with plenty of assets under management and a wealth of experience. If this were a self-fulfilling prophecy, I'd be in the chips by now with my short positions, but the market is a different animal than the economy. As is, I'm in the belly of the beast as the market surges ahead.

Since the beginning of the year I've been kicking the tires on some of the stocks I'd like to buy for my portfolio once the indexes get to more reasonable levels. Most of these equities are in the biotech, wireless, cloud computing and clean energy areas. You could buy blindly into these sectors with ETFs and probably still make some money in the short-term. These industries have gotten their true due from market participants since the March 2009 lows and equity prices have escalated because this is where the growth is. They've been a winning hand and rightfully so. American ingenuity has not gone away and will be here for the foreseeable future if companies like Apple (NASDAQ:AAPL), Acme Packet (NASDAQ:APKT) and (NYSE:CRM) have anything to do about it.

Most of the organizations I have analyzed of late have extremely high valuations for now, next year, and even into 2013. They are great companies, but with P/E Ratios over one hundred in some cases, I just won't go near them. Apple is the exception, but I contend they've reached the law of large numbers and are now ranked third in regards to market capitalization globally. I think that I'm making a reasonable assumption that we will get a pullback and that it may be significant. However, be warned, I've made this assumption for a year and a half with very little success except for the occasional mini correction. That's not going to get me in the Barron's Roundtable.

From doing all of the research for my postings, I am of the belief that we are at the threshold of a new era of growth in technology, specifically in cloud computing. Cloud computing and the buildout of the backbone of Internet 2.0 will encompass every industry and every person that uses a computer, laptop, smartphone or tablet. It touches consumers more so than the personal computer revolution did because the outset of PC adaption was basically a corporate phenomenon. The introduction of word processing and spreadsheet programs like Lotus 1-2-3 made the PC popular in the cubicles across the enterprise landscape. Made life much more easier. They don't cook the books anymore. It's all done with Quicken and Excel.

It took until the Internet was made accessible to the mainstream before your average Joe on the street became wired. A large percentage of the population now has some sort of device that accesses the World Wide Web. Because the cloud enables corporations to save money, it will be implemented and you will be assimilated or left behind. It's a whole new ballgame.


Not every cloud computing stock has gottten ahead of itself. F5 Networks (NASDAQ:FFIV) just had a blowout quarter and I still believe they are reasonably valued, if not undervalued. I am still hesitant to add these shares to the Ithaca Experiment portfolio because when the market crashed in 2008-2009, all P/E Ratios contracted. I am banking on this scenario unfolding again to some extent in the next year or so. Maybe the market won't fall off of a cliff again, but it may grind slowly down.


To reiterate what I've stated in previous postings concerning the economy, I think that this era is more like the 1930's or 1970's, not the 1960's or 1990's. Technology has been on an upward trajectory since the early 1950's, but that doesn't always translate into higher stock prices, at least for the overall market. Some stocks will do well, and they already have the past two years. The issue is whether they will be able to hold their lofty valuations. I am banking that they will come back down to more reasonable metrics.


In the meantime, I will continue to evaluate securities I either find interesting, or that are popular and I don't understand their technology. After all, if my theory is right and we are in a new technology era, there will be things that I will want to know to stay ahead of the curve. I hope I can keep you informed, too.