Peter Lynch Revisited
In one of the best investment books written of all time “One Up on Wall Street”, Peter Lynch discussed the problems that a lot of growth companies encounter as they begin to mature – Deworsification. Deworsification occurs when growth companies start to mature and they turn into cash flow companies. What the company chooses to do with this cash flow is extremely important. In Google’s case they have around $100 per share in cash.So far, in my opinion, Google hasn’t been good stewards of this cash. They make tons of small acquisitions but recently agreed to acquire Motorola Mobility. I’m puzzled as to where this acquisition fits into the core business of Google which is advertising.
The Winds Are a Blowin’
The biggest red flag for me as far as Google spending their cash wisely is the investments they are making in wind farms. They’ve made investments in wind farms in California and even more puzzling is the funding for an underwater ocean grid.
This isn’t a core business for Google…at all. With Motorola Mobility you can at least argue it may help them with mobile advertising but wind farms not so much.
Maybe the wind farm investments are of an altruistic nature but return the cash to the shareholders and let them invest in wind farms should they choose to do so.
Early on in the life cycle of a business it is good to have people at the helm who are visionaries and lead the company towards a future of growth. But once the company starts to mature a more disciplined approach is needed. For awhile Google had this with Eric Schmidt for 10 years. Schmidt helped build the corporate structure needed to see Google along its way. However with Schmidt gone and the founders back running the company it seems as if they are trying to get the innovative entrepreneurial spirit back.
While this is good for a small growing company, it seems to me as if it is causing Google to lose its way a little bit with some of these investments they are making.
The Future of Google
Google is the dominant search engine. They make a lot of money with their pay per click advertising system. This was a great growth engine while the internet was growing and people still had desktop PC’s. But Google hasn’t quite figured out how to monetize the mobile search and make it as profitable and dominate as they are accustomed to.
Facebook is also presenting a challenge for Google. While not a lot of people click on the ads in Facebook, it is eating at the margins of what Google is good at. Facebook has hundreds of millions of “eyeballs” every day and still counting. At some point Facebook will figure out how to monetize ads within its site and could really take a bite out of Google’s dominance.
For me, I’ll just stay away from Google right now until I’m more comfortable with their business strategy and they become more shareholder friendly with their cash allocation decisions.
I don’t think the stock has a huge downside risk (other than market risk) but I don’t see a huge upside either.
Sometimes it’s best just to stay away.
If you are looking for another reason why it is bad trading to try to pick tops, look at the charts of some of the market’s best performers. Today, Starbucks (SBUX), Chipolte Mexican Grill (CMG), and Sherwin Williams (SHW) hit all-time highs. Additionally, Apple (AAPL), Monster Beverage (MNST), Panara (PNRA), and McDonald’s (MCD) are near their all-time highs.
And if you need a reason not to pick bottoms, look at Natural Gas. Nat Gas futures saw a pop following weekly inventory numbers – sending the commodity to $2.069 – before selling pressure slammed prices back to a $1-handle. Nat Gas is higher by 0.8%. In other commodities, Crude Oil and Gold futures are higher by 0.9% to $103.60 and $1,675, respectively.
Other News and Numbers:
– EUR/USD is bid this morning, holding near the top of its range at 1.3175. The US$ Index is down 0.6% to 79.54
– Apparently, there is a rumor that Chinese GDP will be 9% for Q1, 0.6% above expectations. Chinese growth is helping equity and commodity markets
– PC Q1 worldwide sales, according to Gartner, were higher than expected, at 2%. Sales of HP (HPQ) computers were particularly strong, sending the stock up 6.4% to $24.90 today. This could validate HP CEO Meg Whitman’s decision not to gut the PC business
– Yahoo! (YHOO) is fighting activist investors, saying that Carl Icahn can serve as a director, but Daniel Loeb cannot. YHOO is up 1% today to $15.03
Chart Glance: On a daily chart, CMG closed above the Ichimoku Cloud at $331.58 on December 20, 2011, providing a strong buy signal. Since then, the price has rallied above resistance at $350 and moved in a straight line higher.On dips, support will come at $420.55, the Tenkan line from the Ichimoku Cloud. The 50-day moving average is at $398.43; 100-day at $367.69; 200-day at $342.67. The 200-day moving average was strong support in August, October, and November 2011.
Until CMG closes in the Ichimoku cloud, it remains in a clear uptrend. Should prices begin to stall, it might be time to take profits – but until then, we would stay with the trend.
Chipolte Mexican Grill reports earnings on April 19. Earnings per share for the first quarter are expected to be $1.92 a share from $1.46 a share in the year ago period, while first quarter revenues are expected to gain to $630.24 million from $509.38 million for the same quarter last year.
This data is not going to get traders excited… just not much there. At the moment, S&P futures are up 2 points, trading 1,366, while DJIA futures are higher by 19 to 12,763. Crude oil is flat on the session, while Natural Gas gained slightly, but is holding below $2. In terms of Natural Gas, the weekly inventory reports come out this morning at 10:30 a.m. ET. Until producers start to shudder production, prices could fall further.
Currency markets are not much changed overnight either, with EUR/USD holding in a range between 1.31 and 1.3150. USD/JPY is trading just below 81 figure.
More News and Numbers:
– Ahead of its earnings report, Google (GOOG) is indicated 0.6% higher
– AT&T (T) was upgraded to overweight at JPMorgan, sending shares of the telecomm 1.2% higher
– McKesson Corp (MCK) won a contract valued at $31.6 billion from the Department of Veteran’s Affairs. Shares are 4% higher
– Chipotle Mexican Grill (CMG) price target raised to $480: Argus
– Nokia (NOK) cut to Hold: SocGen
– General Dynamics (GD) downgraded to Neutral from Buy: Lazard
– Bed Bath & Beyond (BBBY) downgraded to Hold from Buy: Canaccord Genuity
– PacWest Bancorp (PACW) price target of $25: FBR Capital
Natural Gas broke below $2 today, hitting a low of $1.976, before closing at $1.981. Year-to-date, Natural Gas is down 33.7%. Nat Gas is down 52% over the past year, slightly below Cotton’s 55% decline as the worst-performing major commodity. While these might seem like steep declines, it looks like there is no end in sight to Nat Gas’ declines.
In treasury markets, the 30-year bond and 10-year note yields rose slightly. EUR/USD rose slightly, though finished the day in the middle of its range near the 1.31 figure. USD/JPY closed the day near the 81 figure.
Tomorrow, earnings are ramping up with Commerce Bancshares (CBSH) and Rite Aid (RAD) before the bell. Google (GOOG) reports after the bell. Analysts expect GOOG to report earnings of $9.62 per share compared with $8.08 a year ago. In today’s trading, GOOG gained 1.5% to $635.96.
On Friday, JPMorgan (JPM) and Wells Fargo (WFC) report before the bell.
Bonds yields are higher today, with the 30-year bond and 10-year note trading lower by 0.5% and 0.25%, respectively. EUR/USD was trading higher on the session, though it surrendered some early gains. Halfway through the U.S. session, prices were hovering near the 1.31 figure.
Other News and Numbers:
– The Department of Justice is suing Apple (AAPL) and publishers (CBSA, NWSA, and PSO among them) for colluding on the price of e-books. AAPL is trading flat on the day following the news
– VMWare (VMW) announced that its CFO would be leaving. VMW is down 2.3% to $107.80
– Nokia (NOK) warned on earnings earlier saying that their smartphone might lose connectivity. NOK is lower by 13.4% on the news
Alcoa’s (AA) earnings last night certainly helped set the stage. Many, including us at KOTM, were expecting a disappointing number from the aluminum-producer. AA posted a profit of $0.10 per share, compared with expectations for a loss of $0.04. AA is indicated 5.7% higher at $9.86 in the pre-market.
In currencies, we are not surprised to see EUR/USD higher this morning – as we wrote yesterday. EUR/USD prices showed surprising resiliency over the past two sessions to the sell off in risk. The pair gained 0.5% this morning to 1.3130. USD/JPY is toward the top of its tight range, holding just below the 81 figure.
Crude futures are higher this morning, though with inventory data out at 10:30 a.m. ET, prices may be reluctant to rebound further. Futures are up $0.30 to $101.32 at the moment. Bears continue to point to the $100 figure as a key level to the downside. We would not be surprised to see that level tested following the data this morning. Natural gas prices are also higher, by 0.2%.
Bond yields are slightly higher overnight as the 30-year bond prices are lower by 0.4%. 10-year note futures are down 0.2%.
At 2 p.m. ET, today, the Federal Reserve releases its Beige Book.
– 1-800-Flowers (FLWS) coverage initiated at buy with price target $5: Noble Financial
– Vocus (VOCS) price target moved to $26 from $32: Stifel Nicolaus
– SMSC (SMSC) price target moved to $32 from $26: Needham