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.
Stocks rose this week, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) up 0.5% and 0.9%. Three of the biggest movers among large-capitalization stocks were technology stocks, one of which is a much anticipated newcomer to the public markets, while the two other are Dow components. The three stocks are Twitter (NYSE:TWTR), Cisco Systems (NASDAQ:CSCO), and Microsoft (NASDAQ:MSFT).
Twitter vaulted into the public markets on Thursday, gaining 73% on its first day of trading in the most highly anticipated initial public offering since Facebook's May 2012 debut. As of Friday's market close, the microblogging platform sports a market value of $22.7 billion -- higher than more than three-fifths of the companies in the S&P 500, including a high-flyer like Netflix -- despite being unprofitable (analysts don't expect the company to achieve profitability in 2014, either).
No profits means no price-to-earnings ratio, naturally, but, suffice it to say, 20 times estimated 2014 revenues looks like a very high price tag, indeed. Foolish (with a capital "f") investors know that you're unlikely to get a decent value if you buy a stock when everyone is clamoring to own it. My suggestion to investors who wish to own Twitter shares: Take a breath, continue monitoring the stock, and wait for some of the euphoria to die down, as there will be better buying opportunities to buy the stock in the weeks and months to come.
Cisco Systems has lagged the S&P 500 this year and over periods ranging from two years to at least as far back as a decade -- the further back you go, the wider the gap. However, this week, the shares gained 4.2%, beating the index soundly in the process.
On Wednesday, Barron's reported that Goldman Sachs advised its clients to buy November call options on Cisco shares at a $23 strike price with the stock around $23. Barron's also noted that there was heavy buying of November calls with a $24 strike on Tuesday and Wednesday -- which suggests the buyers expect the stock to rise above $24 by Nov. 16, when the calls expire. What would the catalyst be for such a move? An upside earnings surprise at next Wednesday's fiscal first-quarter results could do the trick.
While I don't recommend investors try to "game" earnings releases, I think this item is noteworthy mainly because it highlights Cisco as potential (long-term) value play. With the stock trading at just 11.2 times the next 12 months' earnings-per-share estimate and sporting a 2.9% dividend yield, I know which of Cisco or Twitter's shares I'd feel more comfortable owning at current prices.
One megacap technology stock that has had no trouble beating the S&P 500 this year is Microsoft, which has gained a magnificent 45% as of Friday's close (not to mention the 3% dividend yield). Last week was no exception, as the stock gained 6.3%, ostensibly on the back of an analyst report published Wednesday predicting that Microsoft will in December appoint Ford CEO Alan Mulally to replace outgoing CEO Steve Ballmer.
Mulally has publicly committed to remaining with Ford through 2014; however, Reuters reported last month that Ford's board might be willing to entertain his departure before he serves out his current commitment. Furthermore, there is no analyst on Wall Street who is closer to Microsoft than Rick Sherlund, the author of the stock-moving report.
Mulally could be an excellent choice to run Microsoft -- I'd expect him to focus on the company's core strengths, and there would be no sacred cows (which appear to be in abundant supply right now). Whether or not he gets the nod from Microsoft's board, one thing is certain: Sentiment regarding Microsoft's stock has improved dramatically, and at 14.1 times estimated earnings per share for the next 12 months, there is no reason to rule out further long-term appreciation.