Saturday, July 24, 2010

Low Hanging Fruit

The market is a funny beast.

This week Apple released amazing results with revenue growth of 60% to name just one highlight. The market's reaction was "whatever!"

Then eBay released a decidedly average forecast and the market's reaction was to jump up 6%.

I know it is all about how the results match expectations but surely anyone can see that Apple is cheap at these levels?

The fact that AAPL shares have increased 500% over the last 5 years perhaps makes people think that they have already missed the ride. But could it be that the ride is just reaching top speed?

Let's assume that Apple earns $20 per share over the next 12 months. Then subtract the cash and securities mountain of $50 per share from the share price to get an "enterprise" price of $210.

What's this? A forward PE of about 10? For this global monster which could be eating Microsoft's enormous PC market share for years to come?

The AAPL results are so good that the executives seem to be doing their best to underplay them. For example they are not bothering to give a non-GAAP EPS (which I calculated at about $3.85) or highlight the huge difference between income and cash flow ($3.25 B compared to $4.8 B.)

Should I sell my EBAY shares and buy more AAPL? Maybe but I am trying to resist the urge to trade. When I bought EBAY at $44 per share about 5 years ago I thought I was getting a once-in-a-lifetime opportunity. And then the EPS growth disappeared and the share price plummeted.

I can't see this happening to Apple but I could be wrong. However if you are looking for a risk / reward ratio that is crazily balanced in your favour look no further than AAPL at these levels.

Wednesday, July 14, 2010

Doubling up on Google

I have been lying low recently, concentrating on other things while keeping half an eye on the market. And it has been a pretty depressing time market-wise with the gains of 2010 gradually ebbing away as the market's confidence disappeared. Google has been typical of stocks in the first half, peaking above $600 when I first bought into it in January and then drifting down all the way to $450 recently.

If I had had a stop loss on GOOG at say 20% I would have stopped out by now and would no longer has a stake in one of the safest growth prospects around. Rather than panic and give up on GOOG I have taken advantage of this low price and bought some more! As Warren Buffet is fond of saying, the attractiveness of a stock increases and the risk decreases as the price goes down. And to paraphrase another Buffet quote, with stocks you don't get extra marks for making hard decisions rather than easy ones. So rather than gamble on some new Biotech whose one drug may or may not be approved I can buy more GOOG with a trailing PE of 20 and a growth rate of almost 20%.

Google is too big to grow at the rates it did in the past but, as it helps the continuing trend of working online rather than off with products like Chrome browser, Chrome OS and Google Docs, it should continue to gain market share in a growing market.

Facebook has been compared to Google as the next big tech IPO. But Facebook is just a website whose adverts are ignored most of the time. Google's search engine is a backbone of the Internet whose sponsored results are often just what the user is looking for. Google is a monster and I want to share in its growth.

GOOG - a stock for the next 20 years. Buy and then buy some more.