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 to new record highs this week, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (^DJI +0.02%) gaining 1.6% and 1.2%. Two of the biggest movers among large-capitalization stocks were technology stocks Qualcomm (QCOM +8.17%) and Cisco Systems (CSCO +4.79%) -- although the former was a winner, while the latter lost ground. Meanwhile, shares of struggling retailer J.C. Penney (JCP +0.00%) had a very good week (the green line represents the S&P 500):
Year to date, shares of mobile-chip specialist Qualcomm have underperformed their peers and the broad market, with an 18.4% price rise against 26.1% for the S&P 500, but the gap narrowed significantly last week, as they shot up 7%.
Much of that rise was no doubt triggered by Goldman Sachs' adding Qualcomm to its "conviction buy" list (its "best ideas" list, if you will), citing a more aggressive capital allocation strategy and expanding chipset margins. The upgrade may have pre-empted a near-term catalyst in the shape of next Wednesday's analyst day, at which Goldman sees the company presenting "a more consistent and structured capital allocation strategy" beyond opportunistic share repurchases (although I can't see what's wrong with those – in fact, opportunistic share buybacks are the best kind).
Goldman also expects Qualcomm to increase its dividend and is forecasting a 2.4% yield by March; the current dividend yield is 1.9%, just below that of the S&P 500.
I'd advise investors against trying to trade around next week's analyst day (much of that positioning appears to have already taken place, anyway), but long-term investors may wish to look at Qualcomm in the context of a price-to-earnings multiple that may have bottomed and a new growth and capital allocation profile. Indeed, as Goldman stated: "FY13 (Sep.) was a transitional year for the stock, as it capped a strong 3-year streak of 31% compounded sales growth. ... The company has now guided for a more moderate, though still solid, 10%+ sales CAGR over the next 5 years."
The current quarter has not been kind to Dow component Cisco Systems, which had been outperforming the S&P 500 last quarter. That outperformance has reversed sharply since the beginning of October, and last week saw the worst of that process, as Cisco Systems shares dropped 11% on Wednesday on the back of a fiscal first-quarter report that included dreadful guidance for the current quarter.
The networking specialist now expects an 8% to 10% year-on-year decline in revenues this quarter, where Wall Street had been looking for a 4% increase. Earnings-per-share guidance of $0.45 to $0.47 was also shy of the $0.52 consensus estimate. Analysts were dumbfounded at the magnitude of the discrepancy.
CEO John Chambers blamed emerging markets for the slowdown, indicating that orders had fallen 21% last quarter, with some of the largest markets registering spectacular declines: Orders in China were off 18%, with drops of 30% and 25%, respectively, for Russia and Brazil. Even Chambers, who always appears upbeat, couldn't put a happy face on those numbers -- "I've never seen this before," he said, summing up the sorry situation.
While this sort of negative surprise will probably weigh on Cisco's stock for several quarters, at its current valuation -- just under 11 times the next 12 months' earnings-per-share estimate -- it looks primed to reward investors who can adopt a multi-year time horizon. The company is hardly disdaining its shareholders, announcing a $15 billion increase in its share repurchase program. If you believe the shares are currently undervalued, that's a genuine source of value creation.
Shares of J.C. Penney jumped 3.9% on Friday, putting them ahead 9.7% on the week. The catalyst for Friday's pop appears to be the disclosure that a number of prominent hedge funds have taken positions in the struggling retailer, including Farallon Capital Management (500,000 shares), activist Jana Partners (489,600 shares), and Appaloosa Management (737,800 shares).
While last week's rise hardly puts a dent in this year's disastrous underperformance -- the shares are still down 54% year to date -- it's possible we have seen the bottom in the stock. Either way, I don't recommend individual investors play in this arena -- deep value stocks and turnarounds are difficult to gauge and time-consuming to follow, and even smart, research-intensive investors can get burned, as another hedge fund investor, Bill Ackman, proved. Ackman, who once sat J.C. Penney's board, closed his position in the retailer earlier this year with an estimated loss of $400 million.
