Saturday, April 12, 2014

I'm not market smart, I really don't understand

A friend last week asked me where I though Facebook should be priced, and should it be more expensive than Apple?  Good question, first off I looked at both stocks; FB is around 60 and APPL is around 420.   On thing for sure in terms of market capitalization AAPL is about 2.5x more valuable than FB, but in terms of p/e then FB wins hands down at 90 vs AAPL around 13.

My friend's question is interesting insofar as there is no fundamental reason why, in terms of earning, FB is almost 8 times more valuable than AAPL.  In fact, the market is saying that every dollar that FB earns is 8 time more valuable than what AAPL produces.  The issue is not how much AAPL but how much earnings growth can be generated -- in fact the stock market doesn't value a company for its past performance but for its potential performance.

Here lies the problem, at this level the stock market is all about feeling and instincts.  There is no way to know how FB will grow and monetize its "eyeballs" and there is no way of knowing that APPL will or not later this year produce the next iphone/iPad device -- something we never knew existed but we now crave. Unless you cheat you cannot know the future!

Most people don't think of stock this way -- they don't really look at the balance sheet (although in the case of both these companies debt is irrelevant) there is a feeling that FB will go 75 or that AAPL will go to 420 -- Analysts -- a surprisingly clueless bunch will give you feelings too, backed by hard data -- that is not really hard.  The financial market can become an echo chambers;  Two years ago, all hedge funds started buying AAPL -- the stock went up because every one wanted to own it.  Of course eventually  AAPL went from 700 to 450 in the space of a few months.

Valuing a company is always difficult, you look at discount cash flow, p/e and other fun metrics, but at the end of the day, a lot that justify the value of a stock is simply greed and trend -- the cool kids are buying XYZ!

Over the past two days the market got a shellacking, as I've said before 2014 has been a wash -- there has been pressure to create hay with certain names (AAPL is one good example_ when a number of bad articles about the post-Job company seems to do nothing right).  But never think that the financial press writes about a specific company for fun, there is always a reason, someone has an objective and is trying to achieve a goal.

The market is like a game of poker -- if you don't know who the sucker is you are it!

What I told my friend:  Interesting, don't look much at Teck stocks, I don't understand the sector -- buy something that has dividends anyway...

Disclaimer:  No position on FB, AAPL or BBD

Note:  Many years ago the #1 rated aerospace analyst (NY) reviewed Bombardier Inc. (TSX: BBD) an aircraft manufacturer  out of Canada.  The analyst wrote that the weakness of the Canadian dollar was going to hit earnings.  In a fit of pique the CFO of the manufacturer sent to the analyst a copy of his now two year old report that said that the strength of the Canadian dollar was going to hit earnings!  In a nutshell the analyst biggest forecast was based on the following thought:  Any currency movement will hurt BBD, which is clearly a stupid comment -- it has to be either one on none, but it cannot be both ways.  That guy was the #1 analyst and his biggest argument for selling BBD was that a strong/weak CAD was going to hurt earning. Not so smart


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