3 Big Movers: Apple, Yahoo!, and Facebook

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

With January in the books, U.S. stocks have recorded their worst month since May 2012, with the benchmark S&P 500 down 3.6% year to date. The narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) , meanwhile, is faring even worse, down 5.3%. While some investors may be flustered by the pick-up in volatility, let's put stock's decline in perspective: as the Financial Times' Michael Mackenzie noted on Friday, "the full extent of [the S&P 500's] drop this month merely erased the gains seen during the last two weeks of 2013." Not all stocks did poorly last week, however, as one of the highest-profile technology names, Facebook (NASDAQ: FB  ) was the fourth best-performing stock in the S&P 500, while two other high-profile technology stocks, Apple (NASDAQ: AAPL  ) and Yahoo! (NASDAQ: YHOO  ) were notable under-performers.

In true contrarian spirit, let's start with the laggards (you won't be disappointed).

Apple shares were down 8.3% on the week, after the company announced its fiscal first-quarter results on Monday afternoon, in what looks like classic myopic overreaction. Apparently, the 51 million iPhones the company sold -- a quarterly record -- was short of the 55 million Wall Street had been expecting; furthermore, guidance for the current quarter also fell short of analysts' expectations.

Admittedly, if your time horizon extends to a couple of quarters, it may be rational to sell on such news, though I'd then be forced to question the rationality of having an inappropriate time horizon, to begin with. If you have a multi-year timeframe, however -- three to five years, at a minimum -- Wall Street's disappointment could be your opportunity. That was my assessment of the reaction to the earnings report, and nothing I have read since then has dissuaded me from that opinion. As I concluded on Monday:

Last Wednesday, legendary investor Carl Icahn tweeted that he had bought $500 million worth of Apple shares within the past two weeks. Thursday, he again took to Twitter to announce that he had added another $500 million worth that very day, bringing his total position to $3.6 billion. If today's after-hours action is any indication, investors will get the opportunity to buy shares at a discount to the price this wily billionaire paid on a billion-dollar commitment. Just remember: Carl Icahn didn't accumulate a $20 billion fortune listening to Wall Street weathervanes.

Sure enough, Carl Icahn announced on Tuesday that he had bought another $500 million of Apple stock. Friends, when an extraordinarily successful investor displays that sort of conviction, it means Apple ought to be at the top of stockpickers' watchlists. Icahn has said several times that investing in Apple is a "no-brainer" -- an exaggeration, no doubt, but it certainly looks like the closest thing to it within the megacap segment. Rendezvous in three to five years' time to check the scorecard.

While Apple shares were roughly flat in 2013, thus badly trailing the S&P 500, those of Yahoo! roughly doubled, massively outperforming the index. There was no outperformance this week for Yahoo, which fell 5% on the back of the company's presentation of its fourth-quarter results on Wednesday morning. As I wrote on Wednesday: "in 2013, investors responded to Mayer's energy, poise, and vision, as Yahoo! stock doubled; however, those intangibles cannot levitate a stock price eternally without corresponding results. Yahoo! continues to lose market share in the digital advertising market to rivals Google and Facebook; 2014 is setting up to be a pivotal year for the company's turnaround -- and for the chief executive who initiated it."

Indeed, the expansion Yahoo!'s forward price-to-earnings multiple contributed 40 percentage points to its 2013 share price return, as investors pushed the multiple up to 25.4. While the $1.59 estimate for the next 12 months' earnings per share has not budged since the start of the year, the multiple, on the other hand, has fallen more than 10% to 22.7. As Yahoo!'s competitors gain momentum, investor confidence in Yahoo! CEO Marissa Mayer's ability to boost the company's earnings power may be waning; a downward rerating in the shares was deserved, in my opinion, and I'd suggest that process could have further to run.

Facebook was the fourth-best performing stock in the S&P 500 this week, with a stunning 14.9% rise on the back of its fourth-quarter results. The numbers were impressive, silencing any doubts (if there were any) that Facebook is now a "mobile franchise," with mobile ad revenue more than half of total ad revenues in the fourth quarter. Here's my assessment from Thursday:

All I can do under the circumstances is marvel, both at Facebook's operating performance and its share valuation: Even before this morning's pop, the stock was valued at 47 times next 12 months' earnings-per-share estimate (although I suspect analysts will raise those estimates shortly). Facebook will need to continue impressing over the coming quarters in order to justify its share multiple.

Despite the pop, Facebook's stock closed on Friday at a multiple of 49.7, which was the low end of its range for the month, as analysts were forced to raise their estimates. No question about it: Facebook is shooting the lights out right now, but the valuation looks pretty rich. With Facebook's market value breaking $150 billion, a back-of-the envelope comparison with Google suggests the best investors can hope for over the next seven years is a 12% annualized return.

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