Enough is Enough?

By December 24, 2018 Blog

For over a year now, we have been banging the drum saying that equities, particularly the equities of high-flying tech companies like Netflix were overpriced.  Today we say, enough is enough.  We are not ready to say that stocks, particularly tech stocks, are cheap across the board, but the extensive overpricing has disappeared, and some high-profile tech companies look downright attractive from a valuation perspective.

To start, the table below updates the results for the ten bubble stocks we called out on October 3.  The ten are down an average of 33.2% as of the close today.  They are down 36.9% if Tesla is excluded.  The ten are down 40.6% from their 2018 highs.  The table also shows the results for Apple and Goggle.  Apple is off 36.5% from its price on October 3 and 37.1% from its high.  Google has held up the best.  It is down 18.8% from its October 3 price and 23.4% from its high.

In our view, these large price drops were not accompanied by a corresponding decline in fundamental value.  Apple is a poster child in this respect.  Though iPhone growth may be slowing the company is the same cash generating machine it was on October 3.  On September 21, 2018, our colleague, Aswath Damodaran, posted what we believed was a conservative valuation of Apple taking account of the slowing iPhone growth.  Over the next ten years, Damodaran projected a rate of revenue growth below that of the overall economy and barely above the rate of inflation.  Using this low growth rate, he arrived at an estimated value of $201, below the then stock price of $220.  He also undertook a simulation analysis and concluded that $176 was the cutoff for the 10th percentile.  As the table shows, the price is now $146.83.  At that price, the company is trading below the average price at which Warren Buffett acquired his shares.  All of this points to a unique buying opportunity.

Apple is not the only example.  General Motors at less than $33 appears to be trading well below its fundamental value.  In our view, this is no longer the time to “get defensive,” but to start looking for opportunities.

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