The New Stock Mantra
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the best life lessons I ever learned was from a photographer friend who put up a chart in our photo ready room that basically said you can only get two out of three of these: fast, cheap, good. Ain’t that the truth? When editors would harangue him about a deadline or spending too much (his expense reports were models of historical fiction) he‘d just point at the chart. He was such a great photographer and nice guy that he got away with it.
So in the world of stocks it can work the same way just by changing those choices to growth, price, earnings. Something very similar to a PEG ratio is what my friend had unwittingly discovered. If you want to buy into a good company that has good earnings and growth you are going to pay more and more. A company may be growing fast, but may be taking on an overload of debt. Unable to keep up with orders, its earnings will suffer and it will get cheap. And sold off. And finally, a company that isn’t growing that fast, but whose earnings and outlook are good, it’s a cheap and good stock.
Here we have it, fast and cheap, cheap and good or good and fast. Your only choices. Depending on your trading or investing time frame there may be a place for at least two of these.
Too Big To Bite?
How I love Apple (NASDAQ: AAPL) the stock, the products, the ‘coolness’ of it all. It’s the closest to being all three but it probably can’t grow as fast as it used to; their new products always cannibalize the old ones and render them virtually obsolete. They have pots and pots of money (a levered free cash flow of 30.50 billion!) and don’t do much for shareholders with it; no buybacks, a teeny tiny token dividend. It’s P/E is reasonable at 14.75 as their earnings have been very good lately but they keep hitting resistance of about $644. Just a few years ago you could have bought Apple for under $100. I remember I once had it for $78 after one of the medical revelations about Steve Jobs. That’s when it was fast and good. Now it’s cheap and good, but probably has the incredible momentum it’s had over the last few years.
How can I say it’s cheap? The P/E says so, compared to its competitors, Amazon and Google. For years a friend kept asking me what she should buy and I always said without any reservations.. Apple. Now, I’m not so sure depending on the timeframe. Apple has gotten so large that the ”law of large numbers’ that’s bandied about may actually be taking hold. That’s not to say it still doesn’t have the best apps, the sleekest hardware, but every earnings season analysts come out and say Apple is too big to grow and it sells off. They say their pipeline down the road can’t continue..blah, blah, blah. I still like Apple, the stock and products. I just don’t expect the stock to move like it used to do. Institutions hold 68.70% having had to scale back as they have made so much money and need to rebalance their portfolios. Apple reports July 24.
Then there’s Netflix, Inc (NASDAQ: NFLX) which once was also an example of fast and good and has now morphed into fast and cheap. It share price was growing like a weed, but Netflix started having problems making deals with content providers and changing its delivery system midstream (no pun intended), from a mail model to a streaming model to a mixed model. Consumers got confused and upset over significant price increases. When once it was fast and good with a super high P/E, it stopped executing like it used to and dived, dived, dived from a high of $289.75 to $60.70. Now it’s much cheaper and its P/E has come down to a more reasonable 28.70. Some analysts believe competition from Amazon, Hulu and Coinstar will make what was once a David that brought down Blockbuster, now the vulnerable Goliath itself. But the number of hours watched has also increased to a billion as CEO Reed Hastings recently posted on his Facebook page. (It seems if you want news on the stock just keep his Facebook page on your screen. This is not the first time he’s posted material news there). The company reports July 24.
Still it has moved up fast since its low and has an 87% institutional hold. It is a perennial favorite of short sellers with 23.40% short of the float. If the numbers Hastings posted are correct and they’ve been able to keep costs down with the content providers, earnings may surprise. But with its history as a battleground stock be careful with this one.
Amazon Still Amazing?
Then there’s Amazon.com (NASDAQ: AMZN), which blew away analysts’ expectations at the last earnings release. Amazon hasn’t really been cheap for a while but now sports a trailing P/E of 179.98. Before those earnings it was trading in a channel around the $160-180’s.
Amazon is amazing with all its various specialty stores: Zappos.com (shoes and clothes), baby store, pet supplies store, electronics..it is kicking derrieres and taking names of the likes of Best Buy, Petsmart, Nordstrom’s and with Prime streaming, Netflix. Of course, the Kindle Fire is aiming directly at Apple and Google. Analysts keep saying the Fire is a loss leader but once you have one you want to get that content from the Kindle store. When customers buy an iPad or iPhone the first thing they want to do is load the cool apps.
Amazon is now fast and good. I was actually surprised to read they have no debt and levered free cash flow of 1.18 billion. They will be reporting on July 26.
Your New Mantra
So, what to do. Well, just keep those three words as a mantra, fast, cheap, good . Then decide what your timeframe is and what you need to balance your portfolio. And thank my photog friend. RIP, dear Bean.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Netflix. Motley Fool newsletter services recommend Amazon.com, Apple, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.