This article is a reprint of my December 19, 2007 RealMoney column.
An Update of My September 2007 Stock Picks
- My picks in September had winners and losers, but fortunately more of the former
- Closing out my bearish stance on Office Depot (ODP)
I wrote six articles in September that included a bullish or bearish stock opinion, and with three months behind them I thought it was a good time to see how they performed and whether any changes were warranted. On the whole, the picks are playing out more or less as planned.
On September 10, I wrote that if Motorola (MOT - Annual Report) could get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there Motorola shares would be worth nearly $23.
Instead, the cash flow position has continued to deteriorate, contributing to former CEO Ed Zander’s recent ouster. The stock is down 7.2% since the article was written, compared to just a 0.5% decline in the S&P 500.
Still, I think the issues at Motorola can be fixed by bringing the costs – particularly research, development and overhead – in line with the current revenue generation. Alternatively, activist shareholder Carl Icahn could push to break the company up into smaller pieces that might be acquired for a higher total than the current company is currently able to garner. Either way, I’m sticking to my guns on Motorola.
On September 11 I made a bearish call on Yahoo! (YHOO), saying I didn’t believe in the consensus growth estimates and that Yahoo isn’t generating enough cash flow today to make waiting for the recovery worthwhile — at least not for me.
Things haven’t gotten any better since then, and the stock has lost 1.1% – although that is a slightly better performance than the 1.7% loss in the S&P over the same period. I remain bearish on Yahoo.
On September 12, I made a bearish call on Office Depot (ODP), saying “things are likely to get worse before they get better.” Things got worse, and after the company missed earnings and delayed filing its required 10Q the stock has lost 23.3%, compared to a 1.7% decline in the S&P 500.
But I also said “it looks like a stock that will pay off in the end,” and I think the current downturn may have taken the worst out of the stock. I have written put options against the shares (a bet that has lost money) and I think there are more reasons to be positive than negative.
Think the worst of the housing downturn is over? Office Depot’s solid cash flow should make it a safer play than homebuilders or financials. Think small-business tech spending will rise? Office Depot’s P/E is a fraction of Dell’s (DELL).
Office Depot could still have some downside, and I don’t expect a quick recovery. But at current valuations I can no longer justify a bearish position, so I’m closing out that call.
On September 17 I made another bearish call, this time against Delta Airlines (DAL). Although the stock looked cheap, after I made some adjustments for earnings quality it looked more like a company recently emerged from bankruptcy (which it is.) The stock has lost 17.7% since that call, compared to a 2.1% decline in the S&P.
Short term, anything can happen as airlines have tons of leverage that can lead to wild swings in profitability in pricing. But long-term I don’t think the major airlines have any better prospects than they did before the previous 10 or so bankruptcies, and I remain bearish.
I weighed in favor of the bulls for Apple (AAPL) on September 17, and was rewarded with a 32.5% increase in the shares, compared to the 2.1% loss for the S&P 500. The share gains cut Apple’s 3.9% free cash flow yield down to 2.9%, so it isn’t the value it was then.
Still, the cash flow rose 250% from the prior year, and Apple’s market share remains small for most of its product lines. The company continues to make desirable products, and if I have to take a chance on a tech name surviving an economic downturn it might as well be Apple.
My last September stock pick was a bullish call on Adobe (ADBE) on the 18th. The stock always seems to sell off after a major product introduction such as the Creative Suite launch in May of this year. Investors tend to sell on that news after buying up the shares in anticipation of it.
Although the sell-off wasn’t very pronounced this year, the shares did get stuck in neutral. My own call may have been a bit early, as the shares are down 6.3% since the article and the S&P is only down 4.9%.
On their earnings call, the company reiterated their guidance for next year. As the next product cycle moves closer, I think my bullishness will pay off.
Disclosure: William Trent owns shares of Adobe (ADBE) and has written naked put options against the shares of Office Depot (ODP).
William Trent currently has a short position in put options related to Office Depot (ODP).