The financial media can be a valuable source of news and relevant information about the market. Unfortunately, it can also amount to little more than a circus sideshow, with strong opinions built on a weak foundation of speculation and questionable analyst downgrades. In recent years, many individuals have become frustrated with so-called financial pundits who seemingly recommend stocks only after they’ve gone up, and turn on companies only after their falls from grace. Following this type of a “buy high/sell low” investment strategy is very likely to result in disappointment.
Relying solely on sell-side analysts is also a treacherous proposition. While analysts within the financial services industry are certainly knowledgeable, they often come under fire for instigating extreme greed or fear among investors, rather than providing reasonable, actionable investment recommendations. Unfortunately for buy-and-hold investors, a recent analyst downgrade and an absurd comparison from Jim Cramer about Apple Inc. (NASDAQ:AAPL) is not only bad advice, it’s outright foolish.
Comparing Apple Inc. (NASDAQ:AAPL)s to oranges
On April 2, Jim Cramer appeared on a morning segment on CNBC and declared that Apple is a lot like J.C. Penney Company, Inc. (NYSE:JCP). In his estimation, there isn’t much that Apple can do about its tailspin, much like the struggling retailer. He called Apple the ‘J.C. Penney of tech’ because of the pervasive analyst pessimism surrounding the stock. Furthermore, relying on the recent Goldman analyst downgrade of the tech giant, he asserts that there aren’t any signs that Apple Inc. (NASDAQ:AAPL)’s product pipeline contains anything promising.
Apple and J.C. Penney have virtually nothing in common aside from falling share prices. Yes, Apple’s share price is down almost 40% from its high of $705 per share. But the job of the investor is to make a reasonable attempt at valuing the true underlying performance of the company. Apple Inc. (NASDAQ:AAPL) recorded fiscal 2012 revenue and diluted earnings per share growth of 45% and 60%, respectively. J.C. Penney, meanwhile, booked a net loss of $552 million or $2.51 per share for the fiscal fourth quarter and a massive loss of $985 million, or $4.49 per share for the most recent fiscal year.
J.C. Penney’s stock is dropping because the company’s very solvency is in question. Apple’s stock is dropping because the company is in the often-painful transition between a growth stock and a value stock.
Apple Inc. (NASDAQ:AAPL) has $137 billion in cash and marketable securities on its balance sheet, amounting to $146 per share, or more than one third of the stock’s market capitalization. If you back out the cash, Apple is trading at 6.5 times fiscal 2012 diluted earnings per share. It’s impossible to calculate a P/E for J.C. Penney, since the company is not profitable.
Apple pays a 2.5% dividend, and is extremely likely to offer investors a massive dividend increase and/or a huge share repurchasing program within the next few weeks. J.C. Penney doesn’t pay a dividend after suspending its dividend program last year.
Building a bridge to nowhere
It’s critically important to remember that sometimes, a stock price can become disconnected from the company’s underlying financial performance. Apple’s fiscal first quarter widely disappointed—and even in that quarter, revenue still grew 17%. Yes, earnings per share were roughly flat in the first quarter year over year, but revenue is the hard part. A company’s expenses can be managed, and all things being equal, if a company’s EPS stalls, I’d much rather it be because expenses were higher than anticipated as opposed to revenue falling.
An analyst downgrade of Apple Inc. (NASDAQ:AAPL), at this point, appears to be relying far too heavily on the stock drop. Where was the downgrade when the stock was trading for $700 per share? Further, to compare Apple to J.C. Penney might make for exciting TV, but in terms of meaningful investment advice, it’s foolish. The only thing the two stocks have in common is that their share prices are dropping. The two stocks shouldn’t be mentioned together–they have nothing in common.
The article Analysts Are Far Too Pessimistic About This Tech Giant originally appeared on Fool.com is written by Robert Ciura.
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