Mr. Market's Big Mistake, and How You Can Profit From It

If you're reading this, chances are you watched as global stock markets fell apart yesterday. The tech-heavy Nasdaq, in particular, ended down close to 7% as bellwether tech names bled red and traders ran for cover.

Apple (Nasdaq: AAPL  ) fell 5.5%. Qualcomm (Nasdaq: QCOM  ) declined 7.3%. And Microsoft (Nasdaq: MSFT  ) , which S&P named as one of five whose debt now rates higher than U.S. Treasuries, closed off 4.7%. Today's rally in the shares of all three of these stocks shows the selloff to be more of Mr. Market's erratic, nonsensical behavior. But if you look at the numbers, you'll see that some stocks are better bargains than others:

Company

Estimated 5-Year Earnings Growth

Excess Cash-Equivalents After Debt

Forward P/E

Apple 22.52% $28.4 billion 13.77
Canon 7.55% $11.3 billion 17.50
Cisco Systems 10.11% $26.6 billion 9.26
Dell 6.00% $6.9 billion 7.85
Google 18.86% $32.9 billion 16.27
Hewlett-Packard 9.22% ($10.2 billion) 6.48
Intel 11.09% $9.4 billion 8.76
IBM 11.83% ($17.9 billion) 12.85
LM Ericsson Telephone 10.00% $7.7 billion 11.74
Microsoft 9.74% $38.2 billion 9.04
Nokia 6.90% $6.1 billion 16.19
Oracle 15.09% $12.9 billion 11.93
Qualcomm 16.47% $9.5 billion 16.12

Sources: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance. Cash is reflective only of short-term investments and does not include long-term investments.

This table tells me two things. First, traders don't care about balance sheets. Some of yesterday's biggest losers have billions in the bank. Second, more than half of these top techs trade below the long-term growth estimates analysts have set. Here's a look at the eight with the widest deltas between P/E and anticipated growth, and their resulting PEG ratios:

Company

Delta Between Estimated Growth and P/E

PEG Ratio

Apple 8.75 0.61
Cisco 0.85 0.92
Google 2.59 0.86
Hewlett-Packard 2.74 0.70
Intel 2.33 0.79
Microsoft 0.70 0.93
Oracle 3.16 0.79
Qualcomm 0.35 0.98

Sources: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance.

The case for Apple gets stronger
Based on the numbers alone, I think there are good cases to be made for Intel (Nasdaq: INTC  ) and Google (Nasdaq: GOOG  ) . I'm less convinced of HP's value, regardless of what the PEG says. Of them all, I love how the fastest grower -- a certain maker of Macintosh computers -- also sports the most attractive valuation on the basis of price to earnings to projected growth.

True, the PEG can make for extremely dangerous shorthand, especially in the hands of an investor who's done no other valuation work or study of the underlying business. But in Apple's case, the 0.61 PEG looks delicious for two reasons:

  1. Estimates call for less than half the annualized growth achieved over the past five years.
  2. Analysts routinely underestimate Apple's growth potential.

There's also the company's cash hoard to consider: $28 billion if you don't count long-term investments, $76 billion if you do. Giving Apple full credit for its war chest wouldn't be fair, given its history of earning poor cash returns. But partial credit would make sense.

Apple and Microsoft are two of the industry's best at producing returns on available capital, which includes the billions in cash each company generates annually. Add it all up and you have a selloff that may as well have been an early Christmas gift from Mr. Market and his merry band of panicked traders.

Do you agree? Disagree? Weigh in using the comments box below. And if you're in the mood for more stock ideas, try this free video. You'll walk away with a better understanding of a new computing revolution that's reshaping industries as well as a winning pick from our Motley Fool Rule Breakers scorecard.  Start watching now -- it's 100% free.

Fool contributorTim Beyers is a member of theMotley Fool Rule Breakers stock-picking team. He owned shares of Apple, Google, IBM, and Oracle at the time of publication. Check out Tim'sportfolio holdings andFoolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insightsdelivered directly to your RSS reader.

The Motley Fool owns shares of IBM, Google, Oracle, Apple, Microsoft, and Qualcomm, Cisco, and Intel, has created a bull call spread position on Cisco, and has bought calls on Intel.Motley Fool newsletter services have recommended buying shares of Cisco Systems, Intel, Apple, Google, and Microsoft, creating bull call spread positions in Apple and Microsoft, and creating a diagonal call position in Intel.Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 09, 2011, at 11:06 PM, vgaymer wrote:

    I don't like forward metrics because they're based on estimates which can be waaay off. You kind of touched on that in your PEG comment about apple.

    For instance in my non-analyst, big picture opinion, the earnings growth for Cisco, Dell, and Nokia are really pushing it unless they cut expenses(like say Cisco's unfortunate layoffs) , but I feel the top lines will decrease.

    QCom looks tempting though and pays a dividend.

    Cheers,

    G

  • Report this Comment On August 10, 2011, at 10:09 AM, David369 wrote:

    Well, it's at least more exact than picking horse bets based on odds. Still a little fuzzy and confusing to me. I guess if there was an exact method to quantify and forecast a company's value it would take all the fun out of investing.

  • Report this Comment On August 10, 2011, at 12:09 PM, Borbality wrote:

    I already had some GOOG and QCOM, but I seriously can't believe how cheap all the top-weighted stocks in the QQQ index are. They already looked cheap, although some wont' grow as fast as expected (MSFT, Cicso?) but after this recent and continuing downturn, I can't believe how cheap it's getting.

    These stocks usually have little to no debt, minuscule P/e and continue to grow.

    And yes any drop at all is going to make AAPL look even better. It's getting very hard to resist, but I don't want to sell anything to raise more cash.

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