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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Which Companies Deserve the Benefit of the Doubt? |
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Say what you want about the soulless nature of corporate America, in some ways, companies are like people. Some have proven themselves more reliable and trustworthy than others, and as such investors can have more confidence in them. If you own Coca-Cola (KO), Wrigley (WWY), or Johnson & Johnson (JNJ) you should be able to sleep easy at night knowing that you own some of the most reliable and established companies in the world. This isn’t meant to detract from certain companies (and stocks) without a long and proven track record, but to put into perspective some implied investor perceptions that I see as problematic, given that the high multiples that are being attached to their stock prices are primarily the result of recent one-hit-wonder success. The first company that springs to mind given its full slate of new product offerings is Apple (AAPL). Yes, the iPod has been an excellent growth driver, but its flagship Mac computer line still maintains a single-digit market share in the range of 5-6%. Still, that fate is better than that of numerous other Apple product launches (the Newton, Pippin, and Mac Cube come to mind), yet investor sentiment makes it seem like AAPL is a sure bet, as evidenced by articles titled along the lines of “Why Betting Against Apple is Sure to Backfire.” Given Apple’s history of creating amazingly un-loved and unprofitable products, I feel that having AAPL trade at 21x both EBITDA and FCF shows that the market believes future product rollouts will be a huge success. I know I’ll raise the ire of Macaholics (the full 4.5% of you who view this site with Safari) saying this, but AAPL is showing signs of froth. The company may very well break the one-hit wonder image it holds in my (and many others’) minds, but I’m going to sit this one out because of the inherent uncertainty. File this one under “Warren Buffett Investment Rule #1: Never Lose Money.” Naturally, I’m going to progress to Google (GOOG) here. I can sit here and talk about how the valuation multiples (26x EBITDA, 70x FCF) cannot be justified using anything close to conservative forecasts, but I feel that is largely a lost cause - although keep in mind that, at some point, valuation will matter for GOOG and (borrowing a page from D.R. Horton CEO Don Tomnitz) I think it will undoubtedly suck to be long at that time. Microsoft (MSFT) and Yahoo (YHOO) aren’t dead in web search or advertising yet - especially after Microsoft’s deal to purchase aQuantive (AQNT - a story for another day, as the IRA deposit check that was going into that stock didn’t clear until the afternoon following the announcement of the deal). Right now, Google operates on about 30% profit margins, and you have to be delusional to think that Microsoft isn’t going to use some of its remaining $20 billion in cash to attack that sector, and with billions in FCF guaranteed to flow in from Vista, I wouldn’t bet against Microsoft to make a hard push into online advertising and cannibalize some of Google’s growth there given the attractive profitability of the industry as well as the still-wide-open playing field. I hear Sun Microsystems’ (SUNW) Java is a wonderful tool for software developers, but I fail to see the value created by the company. I believe I’ve only mentioned the company twice before - both times in a negative light - and the underlying problem I see is a lack of profitable avenues for the company to pursue. Sun operates on razor-thin margins, and they don’t sport a particularly attractive valuation to compensate for that fact. Something that would further trouble me if I was a SUNW shareholder is a recent entry posted in CEO Jonathan Schwartz’s blog where he asserts his belief in the future of open source software. If you own a company that distributes software, the last thing you should be advocating the open-sourcing of software, because it makes your product free, and free products make no money. Maybe there is something noble about advancing the development of systems software. If so, Mr. Schwartz should feel free to join an open-source company, or start his own enterprise. There is no nobility in poverty, and with almost $20 billion in shareholder value on the line, further open-sourcing on the part of Sun almost seems like a surrender flag from such a company that only attained marginal profitability to begin with. That, and other reasons, reaffirm my belief that Sun is going to continue to underperform, and hence be an excellent short play. |