Thursday, September 1, 2011

The Halo Effect: Many Big-Name Stocks Cheaper Than During 2008-09 Crisis

Analysis: Big-name stocks cheaper than during 2008-09 crisis

The above article points out that some of the companies on this list are hardly obscure. Examples given:

Apple (AAPL)
JP Morgan (JPM)
Microsoft (MSFT)
Wal-Mart (WMT)

Barron's website provides a easy way to check for the consensus current/forward operating earnings estimates and P/Es for the 30 Dow Industrials.

Barron's: Consensus Operating Earnings Estimates for the Dow Industrials

Currently, there are plenty of Dow Industrials with single digit P/Es.

Some worth noting:

Chevron (CVX): 7.1x 2011 earnings
Cisco (CSCO): 9.3
Exxon (XOM): 8.3
Hewlett Packard (HPQ): 5.4
Intel (INTC): 8.2
Merck (MRK): 8.5
Pfizer (PFE): 8.0

The margin of safety on some of these is rather large even if some of the earnings estimates prove too optimistic.

Now, consider the so-called "halo effect" described in this WSJ article:

The Halo Effect: How it Polishes Apple's and Buffett's Image

...a soaring stock price can lead investors to regard the company's managers as focused, disciplined and passionate—while, in the negative halo of a falling stock price, the same executives will now seem stubborn, unimaginative and resistant to change. 

Investors think, at either time, that they are evaluating the stock and the managers independently, but one opinion inevitably colors the other, often leading investors to be too bullish on the upside and too bearish on the downside.

Some of the above stocks may be down because of the negative "halo effect". Eventually, even for a business experiencing real difficulties, the price gets low enough to compensate for the risks involved.

There are times when its hard to find an inexpensive shares of, more or less, solid businesses.

This isn't one of them.

Adam

Long positions in AAPL, JPM, MSFT, WMT, CVX, CSCO, HPQ, INTC, and PFE

* Apple, Microsoft, Intel, and Cisco have substantial net cash positions on the balance sheet. So each of those businesses looks even cheaper when making the adjustment for net cash.
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