Sentiment / Fundamental Analysis
In order to better analyze the current situation, I decided to look for signs of excessive bullishness, bubble like conditions and stock buying rampage. After exhaustive research, I could not come up with a compelling case for a top being formed. In fact, I came across an interesting article at MarketWatch by James Altucher, which pretty much summarizes the sentiment picture and supports the possibility of an impending Breakout.
The numbers: Jim Cramer compared LinkedIn to TheGlobe when it went public in 1998. This is ridiculous. TheGlobe had less than a half million in revenues. Linked in had $243 million in revenues in 2010. It doesn’t mean that LinkedIn is necessarily a bad investment or a good investment. Bad investments happen in bubbles and non-bubbles. But certainly it’s a real company where people are willing to pay for its services.
Definition: A bubble is defined as a market where an asset goes up one day solely because it was up the day before. In other words, people see it going up, so they rush in because they are greedy that it will go up more. But in today’s market, one can say that companies such as LinkedIn and Groupon are not in bubble territory because it is quite possible that their future cash flows will back into their market value. Let’s not forget that Dendreon Corp. had a $5 billion market cap before it had any revenues. This is because many people, probably correctly, assumed that once prostate-cancer treatment Provenge started getting sold at $90,000 a month, usage would justify the $5 billion market cap. With TheGlobe.com it was almost impossible to back into a multibillion dollar market cap.
Mutual Fund redemptions: We are on track for the fifth straight year of higher mutual fund redemptions than inflows. This year so far, mutual funds have lost $8 billion to redemptions. In a bubble, retail investors are obviously doing the reverse. They are so afraid to miss the pop in their favorite asset class that they put MORE money into mutual funds, not less. Domestic mutual funds added $1.3 trillion in assets in the 90s. So far in the 00s they have lost $59 billion.
Earnings: Zynga is often cited as Exhibit A of the bubble we are heading into. Zynga might be worth up to $20 billion in an IPO. Who knows? What we do know is that it had almost $400 million in cash flow in 2010 and is the fastest growing (in terms of earnings) company in history. Of course people want to invest in these companies! If you pick the right one you’ll end up owning the world’s first trillion-dollar company, based on cash flows, not bubble-like projections.
Valuations of public companies: Because of the massive redemptions in domestic equity mutual funds, tech stocks in the U.S. are 1/10 as expensive as they were in the bubble days of 2000. CSCO had a P/E ratio of over 100 in 2000. Now it’s at 12. AAPL also was over 100. Now, its forward P/E, without backing out its $65 billion in cash, is at 12. Even GOOG is at a forward P/E of 15. Nobody would call these bubble valuations. In a bubble these valuations might be 10 times higher, and a market cap weighted index like the Nasdaq 100 would already be at all-time highs if Apple, for example, was trading at 100 times earnings.
Innovation. Google just launched Google+. Considering that Facebook recently traded at an $84 billion valuation in the secondary market, the advent of a competitor to Facebook might significantly add to Google’s already cheap valuation. Apple just released the iCloud, allowing users for the first time ever to seamlessly update all of their Apple devices from the same source in the cloud. Apple will also be releasing the iPad3 in the fall (most likely) and will continue with new releases of the iPhone 5,6,7, etc. Meanwhile, Google is working on cars that drive on the highways without any drivers, just radar. The innovation economy is more in place than ever. In a bubble, companies are formed with no assets JUST to go public and make money for their creators. At the moment, the companies mentioned above are all focused on their customers.