Charts, Markets, Technology, Trading

Watch The MoMo’s For Signs Of A Top

Momentum has been the name of the game for traders this year. There are countless stocks that have risen manyfold since the beginning of 2013 and internet stocks have led the pack. This is why the king of floor traders, Art Cashin, said last week that the current environment feels a lot like the internet bubble to him.

But momentum is a fickle friend. Should the euphoria in these stocks begin to wane traders could jump ship just as quickly as they hopped on. Here are a few to pay attention to:

nflxNetflix announced earnings yesterday and CEO Reed Hastings had this to say:

In calendar year 2003 we were the highest performing stock on Nasdaq. We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003.

Props to Reed for having the balls to say what I’m sure plenty of other execs are thinking. After surging 10% on earnings Netflix has seen a pretty brutal reversal and is now down half as much as it gained earlier in the day.

fbFacebook has seen its stock price more than double over the past 3 months despite the fact that all reports suggest its flagship site is waning in popularity.

lnkdLinkedIn has been a favorite of internet investors for quite a while and for good reason; it’s probably got the most solid business plan. The stock price took a good hit a couple of weeks ago and though it has recovered nicely since it hasn’t been able to follow the indexes to new highs.pPandora has had a terrific year by any standard but looks to be forming a broadening top pattern.zZillow has now formed a clear head and shoulders top with implications for both the momo internet stocks and possibly the real estate sector.tslaTesla is perhaps the most beloved of all as it’s been the best performer of this group. Like Zillow, it has also formed a head and shoulders top pattern. Should investors lose faith here it could sour the mood toward momentum stocks in general.

UPDATE:

Add these two to the list, as well (HT, Toddo):

yelpYelp has tripled over the past few months.

pclnTraders like to say, ‘don’t short the Shat,’ but nothing goes up in a straight line forever – not even Priceline.com

 

 

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Charts, Markets, Technology, Trading

Is This The Internet Bubble’s Long-Awaited ‘Echo Bubble’?

Yesterday I brought to your attention the “wedge” reversal pattern that has now formed in the Nasdaq 100. Today we get the chart below from Bespoke showing just how much the internet sector has outperformed the broader indexes over the past few years. That green line has nearly gone parabolic this year; clearly they’re partying like it’s 1999!

internet stocks

Another relevant chart that drew my attention is this next one that comes from John Hussman. He essentially overlayed Didier Sornette’s bubble model on top of the S&P 500 since 2010 and, what do you know, they match up pretty well!

stock bubble

All this begs the question, is this the internet bubble’s long-awaited “echo bubble“? All I can say is that it would be rather poetic considering the internet-heavy Nasdaq 100 has now retraced a near-perfect Fibonacci 61.8% of the crash.

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Technology

Flipboard + Twitter = The Ultimate Newspaper Killer

flipboard

Longtime readers know I’m a news junkie. Well, I’ve finally given up on traditional newspapers. Don’t get me wrong; I love holding a real paper in my hands. But I just don’t need one anymore. That’s because I’ve finally fine-tuned an incredible alternative. It brings together the best news sources in the world, prioritizes them based their relevance to YOU and puts it all into an elegant and efficient reader.

I’ve been on Twitter since 2007. I’ve followed and unfollowed thousands of different accounts over time to fine tune the social network into something of great value for me in my work. It’s come so far that it’s now my best source for breaking news and commentary anywhere online.

I only follow a small number of actual Twitter accounts these days so that my main stream isn’t overwhelmed. I organize all the other Twitter accounts I want to track into lists. Among these are the Wall Street Journal, Washington Post, Daily Beast, Business Insider, Financial Times, The Economist, Rolling Stone, along with reporters, professional investors and experts like Dennis Gartman, Carl Icahn, Michael Santoli, Todd Harrison, Jim Grant, Doug Kass and plenty others that share anything and everything you’d ever want or need to know about what’s going on in the financial markets and the world.

But here’s where it gets cool. There’s no way I can keep up with all of this information 24 hours a day. So we add Flipboard, a free app for your smartphone or tablet, into the mix and we get a magical news reader that aggregates and prioritizes all these tweets and gives us the latest and greatest news and views you can find and all in one place.

All you’ve got to do is add your Twitter account in the Flipboard app and then add your lists and then you’ve got your front page, world news, business, sports and entertainment all right there. The best part is that it’s real time, encompasses far more than a single newspaper could dream of covering and uses social media to make sure it’s relevant to you.

You’re welcome.

You can check out my personal Flipboard magazine, “Contrarian Curations,” here.

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Featured, Technology

Mr. Market Is Not Impressed With Apple (And Why He’s Wrong)

You may remember McKayla Maroney’s reaction to winning the silver medal (losing gold?) in the vault during the 2012 Summer Olympics. It became such an online sensation that the president struck the pose with her when she visited him in the oval office after the games. After Apple’s earnings report yesterday, Mr. Market made the same “unimpressed” face and sent the shares down 12% in today’s trading session.

The reason Mr. Market is unhappy with Apple’s earnings is that the company was unable to grow its reported profits from the same quarter last year. Sales were up nearly 18% from the year earlier but costs per sale increased enough (gross margins declined enough) that net earnings matched the year earlier’s number. Investors are lamenting that one of the greatest growth stories of all time is seemingly coming to an end. But if you know Mr. Market you know he doesn’t always act rationally and I would suggest that this is one of those times.

Though earnings didn’t grow, sales grew significantly suggesting that the appetite for Apple’s products is still very healthy. In addition, cash flow grew from the prior year by 33%. Personally, I prefer to look at cash flow over earnings because it’s the true measure of how much cash a company generates. When a company’s earnings are better than their cash flows I raise a skeptical eyebrow. In Apple’s case it’s just the opposite. Cash flows in the last quarter were significantly healthier than reported earnings.

Free cash flow, or cash flow minus capital expenditures, was very healthy, as well. Apple grew free cash flow 30% in the quarter to over $21 billion. Over the past twelve months the company has generated a total of $47.4 billion in free cash flow taking its cash pile north of $137 billion. These numbers are simply phenomenal. To put them in perspective, Business Insider noted today that Amazon.com has earned a mere $5 billion in its entire history. Apple generated nearly triple that amount in its last quarter.

To further demonstrate Apple’s amazing profit machine consider that aside from the company’s cash pile it has about $32.5 billion at work on its balance sheet that is responsible for generating that $47.4 billion in free cash flow. That’s greater than a 145% return on invested capital. A company generating a 45% return is considered a super star in the corporate world. 145% is absolutely astronomical. Put the cash back in to the equation and the company generates a still meaty 28% return on total assets.

So let’s take a look at what investors are really paying for in Apple’s shares today. The current market capitalization is $422 billion (938 million shares times $453 per share). Back out the cash of $137 billion and you get an enterprise value of $285 billion. That amounts to a mere 6 times the company’s free cash flow over the past twelve months. In other words, investors get a 16.6% free cash flow return on their investment at the current share price. What’s more, Apple, on an enterprise value to EBITDA measure, is now cheaper than the likes of Microsoft and Radio Shack.

Even when you don’t back out the cash in its bank accounts the stock currently trades at its cheapest valuation at any time over the past decade. Over that time, Apple’s stock price has typically found a bottom near 10 times gross cash flow. In 2011, it bottomed at 8.5 times cash flow before running 75% higher over the next 12 months. Today, it trades at 7.5 times cash flow. Any way you slice it that’s damn cheap and for one of the most admired brands/most profitable companies in history.

Now this is all rear view mirror analysis. We all know that the market is a discounting mechanism so what really matters is what Apple does over the next twelve months and beyond. The current valuation suggests to me that investors believe the company is already in decline like Microsoft and Radio Shack, as I mentioned above. Think about that: even if Microsoft were to acquire Radio Shack to have a retail presence to compete with Apple stores would you take that bet? Not a chance. There’s no way in hell those two could come close to generating an 18% sales gain let alone free cash flow margin of 28.8% like Apple just did in this last quarter (Microsoft just announced a 2.7% sales gain and 16% free cash flow margin, in fact. Radio Shack’s numbers are worse.).

Looking forward, Apple’s product demand remains strong. The company said on the conference call that manufacturing and supply constraints are still a major problem for their most popular products. In my world, that is the best kind of problem to have. To me it indicates future sales will continue to be strong. Apple has also said they will not chase market share for its own sake and so I expect gross margins to hold around 35-40%. All in all, then, sales and cash flow should continue to grow.

I wrote about “capitulation” the other day. In Apple’s case it feels like the bulls are capitulating here. There is so much negativity surrounding the stock right now that just can’t be justified by the hard numbers. Based on sales and free cash flow the company is still killing it. Their products are in amazing demand. They sold 75 million mobile devices in one quarter, for crying out loud. Investors are not so much reacting to these numbers as they are to their own emotions at seeing the stock price fall 35% over the past few months.

I bought a couple of shares for my kids today and explained it this way: buying the stock at the current price is better than buying a new iPad at half price. You get something great at a fabulous discount and rather than be on the buying end of the upgrade cycle you’ll be on the selling end. And I expect sometime soon Mr. Market and everyone else who sold today will look as silly as McKayla did frowning at something that should be celebrated.

Chart(s) of the Day

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On the daily chart I’ve added Tom DeMark’s sequential indicators. I know Tom loves this 9-13-9 pattern; he considers it one of the most powerful in his arsenal. As you may remember he called a bottom in the stock on that last 9 a little over a week ago. Today’s selloff took the share price below this and even his “risk level.” Normally, this risk level indicates where you should put your stop loss but Tom has also said that a false break of the risk level is sometimes the best place to buy. We’ll see if the stock can manage to regain that level over the next couple of sessions. The next step would be a move above the upper line of that ending diagonal ($520ish) to confirm that pattern. We’ll keep our eyes open.

sc (3)

This next chart is absolutely critical. Apple has fallen to a key level that marks the intersection between its 38.2% retracement (a Fibonacci level) and its weekly uptrend line. Actually, it broke below this level which sits at about $463. If it can regain this level I believe it has a very good chance of forming a bottom here. Stay tuned, folks.

 

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