Why the Numbers Matter Less - For Now

Paula is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Most veteran investors will agree that mis-pricing of securities commonly occurs in choppy or down-trending markets.  Lately, however, a disproportionate number of stocks seem scorned or adored beyond all reason.  The macro picture – namely, the crisis in Europe, slowing growth in China, and the so-called fiscal cliff here at home – may be partly to blame for irrational pricing, but many stocks have languished on improving forecasts while others soar on weak or questionable guidance.  And with the exception of love for the housing group and disdain for commodities, it’s difficult to find patterns worth betting on. 

Investors who harbor any doubt that the market overdoes it both to the upside and downside should look at this list of high flying and hell-bound stocks.  Collectively, they demonstrate that irrational fear and irrational exuberance can persist for longer than you might expect.

Superb Business, Scary Valuation

In its pursuit of hegemony in online retail, Amazon.com (NASDAQ: AMZN) has spent a lot of money.  So much that the company’s earnings-per-share have fallen in ten of the last twelve reported quarters.  Although Amazon’s revenue has almost doubled since 2008, the company kept less than half of that increase in 2011 due to skyrocketing operating expenses.  Amazon fans defend the profligacy of CEO Jeffrey Bezos, who may well achieve a position of dominance in online retail that will endure for years into the future.  Investors also see a massive opportunity in the secular trend away from bricks-and-mortar stores to online selling of millions of products.  

With Amazon’s stock up 68% since the beginning of 2010 and 26% year-to-date, believers continue to show they have religion on Amazon’s model.  The company trades at more than 13 times book, with a trailing P/E of 3,000 and change.  Analysts, who’ve been wildly inaccurate in their quarterly estimates but more reliable over entire fiscal years, expect the company to earn $1.77 per share in 2013 (over a small loss this year) and $3.80 in 2014.    

Another Victim of the Dry Gas Boom

Halliburton (NYSE: HAL) is a manufacturer of oilfield equipment and a provider of services to the oil and gas industry.  This makes Halliburton a member of the commodities complex, which has been decidedly out of favor since early 2011.  Like many of the drillers, Halliburton has been punished more for declining earnings than some exploration and production firms have been punished for losses on weak natural gas prices.  Although the company saw Q3 net income trimmed due to reduced domestic drilling activity, CEO David Lesar remains optimistic longer-term on deep water drilling and under-serviced international markets.  Analysts’ consensus estimates on Halliburton’s performance have generally proven conservative in the past, and almost two-thirds of analysts covering the stock currently rate it a strong buy or outperform.  Halliburton shares are down 11% on the year and 25% from the 52-week high.  The company trades at 9 times earnings and has a PEG of 0.6. 

A Clouded Forecast

Salesforce.com (NYSE: CRM) provides subscription-based applications for customer relationship management via cloud computing.  Loosely translated, this means that Salesforce.com uses the internet and social media to help companies find and keep customers.  The company hasn’t posted a positive quarter since Q2 2010, but that hasn’t stopped investors from bidding the stock up 60%.  As Salesforce.com already owns almost half of the market for its principal business line, investors must be betting on the company attaining a monopoly in the sales automation space.  Salesforce.com sells at 72 times next year’s expected earnings and 10 times book value.  Analysts, who have a record of materially overestimating Salesforce.com’s potential, expect the company to lose money into 2013 and then become wildly profitable in 2014.  Traders, however, aren’t waiting another year for earnings to materialize from the cloud.  Salesforce.com shares have gained over 42% in 2012 and targets indicate significant upside again next year.    

Another Victim of the Slowdown in China

Aluminum-maker Alcoa (NYSE: AA) has lost more than half its value since early 2010 and currently trades near its 1980’s highs.  Quarterly losses, however, are nowhere near those reported in the Great Recession of 2008 to 2009.  Furthermore, contrarians expecting improvements in global infrastructure spending, and the aerospace and auto sectors see metrics beginning to turn for Alcoa in 2013.  Consensus estimates show a dramatic increase in earnings per share next year, which makes Alcoa look interesting here.   Possible headwinds for the company include a failed re-acceleration in Chinese and Indian growth, weaker than expected auto sales, and an increased industry swap-out of aluminum for carbon-fibre.  However, with a forward multiple of 12 and the stock off another 11% in 2012, Alcoa is already reflecting some dire scenarios.

While grossly over- and undervalued stocks exist in every market, global uncertainties and dislocations (such as a high unemployment concurrent with reasonable consumer health) can lead to some unusual pricing.  Some strategists argue that funds flowing out of commodities and materials have inflated the valuations of go-to stocks like Salesforce.com.  Given the current backdrop, the market will probably continue to disappoint those expecting an across-the-board “return to fundamentals.”  On the other hand, Mr. Market also has a way of savaging those who think that only sentiment matters. 

webscribe has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Salesforce.com, and Halliburton Company and has the following options: long JAN 2013 $50.00 puts on Salesforce.com, long JAN 2013 $50.00 puts on Salesforce.com, short JAN 2013 $50.00 calls on Salesforce.com, and short JAN 2013 $50.00 calls on Salesforce.com. Motley Fool newsletter services recommend Amazon.com, Salesforce.com, and Halliburton Company. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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