Apple and Gilead: Past the Point of Peak Perception?

The Company is Not the Stock

Apple and Gilead: Past the Point of Peak Perception?

A New Leading Stock in Cybersecurity

The Company is Not the Stock

Even experienced investors can get tripped up on the simple premise that the company is not the stock. The company is, well, the company-it owns physical buildings and intellectual capital (patents, know-how, etc.), has hundreds or thousands of employees that produce and sell its products or services, which will (ideally) produce profits.

The stock, of course, is technically an ownership stake in the company. But, really, it’s a piece of paper whose value is determined by investors’ perception of the company. That’s the key word: perception. The company itself can grow for years, but if the perception of the company fades, so will the stock price.

Many people might say, “Well, sure Mike, a stock can go up or down for a few weeks or even a couple of months based on emotion-but over the long run, a good growth company will see its stock price rise.” Heck, I used to say that same thing myself-but it’s frequently not the case!

The best example of why perception is what counts in the stock market is McDonald’s (MCD) during the 1970s. From the beginning of 1973 to the end of 1980 (eight full years), the stock declined 37%. And the stock dramatically underperformed the market itself during that time, too.

Yet during those eight years, McDonald’s the company saw earnings grow more than sixfold and never had a down quarter. That’s right! But the stock went from trading around 80-times-earnings at its peak to nine-times-earnings at the end of 1980. Heck, even if you look at MCD’s sub-peak in early 1976, when the P/E ratio was a more reasonable 30, the stock lost ground and underperformed for the next four years. The perception of the company had made a huge 180-degree turn.

Granted, MCD in the 1970s is an extreme example … but there are countless examples of stocks that diverge from the companies’ “fundamentals” for a year or two or three because big investors’ perception of the companies changed.

Apple and Gilead: Past the Point of Peak Perception?

I’m writing about this today to give you background before I discuss two big-cap companies that are popular and continue to do very well: Apple (AAPL) and Gilead Sciences (GILD).

Both companies are making a ton of money, are using their cash flow to buy back stock and pay decent dividends. And all estimates and indications are that the companies will continue to make a boatload of money in 2016 and beyond. Heck, the stocks are even cheap by most measures, with AAPL’s P/E ratio currently 12 and GILD’s 9.

Thus, as companies, things look good for Apple and Gilead. The stocks, however, have acted ragged for months.

Despite being known as “a leader,” AAPL hasn’t made any progress since Thanksgiving 2014, and relative to the market, AAPL actually peaked way back in 2012! More recently, the stock has lagged the market since February of this year.

Most importantly, earnings growth at Apple is expected to slow markedly-analysts see the bottom line rising just 7% during the next year.

The picture is similar for GILD. The stock hasn’t made any progress since August 2014, and relative to the market, the stock peaked in October of last year. Analysts see earnings flat in 2016.

Neither of these stocks even make my screens anymore-there’s not enough growth in the companies, and there’s not enough buying power or resilience in the stocks’ charts.

I don’t think AAPL or GILD are set to fall 50%, but barring some unforeseen new products (and given that dozens of analysts cover these companies, you’d think they’d get wind of it), I can’t imagine these stocks becoming real leaders again-in fact, I could see them sag as growth-oriented mutual funds drop them in favor of faster horses.

In other words, both AAPL and GILD are past the point of peak perception … and that means the best days for these stocks are likely in the past.

A New Leading Stock in Cybersecurity

Finding faster horses is what consumes most of my workdays (and a good part of my weekends too). Granted, the current market environment (a weak broad market and iffy action among the major indexes) isn’t the best for finding potential new winners, but there are still many stocks in pole position should a sustained rally get underway.

One place to look is well-traded stocks that are showing both great fundamental growth and solid stock action-what I call “liquid leaders.” Should the market continue its rally, I’m confident Amazon (AMZN), Facebook (FB), Nvidia (NVDA) and LinkedIn (LNKD) will be liquid leaders, with others potentially emerging down the road.

You don’t have to fish exclusively in the ocean of big-cap stocks. For example, smaller companies in cybersecurity are showing great potential. The fundamental backdrop is about as bullish as can be, with companies of all sizes realizing that network protection is now a necessity. But while some of the stocks of bigger players are looking damaged after long runs, I’m seeing a couple of niche players remain in great shape.

One is Imperva (IMPV). Here’s what I wrote about the company a couple of weeks ago in Cabot Top Ten Trader:

“Six months ago, every stock involved in cybersecurity was red hot, but now it’s become more selective-some stocks have been trashed (like FireEye), some are base-building (Palo Alto Networks) and some niche players, like Imperva, look great. Imperva is a smaller player (just $213 million in revenue) in the industry, but it’s made a name for itself by having some of the best products for Web and application-specific firewall products. Most companies have big-picture network firewalls, but demand is now exploding for application- and data-specific protections, which have seen increasing attacks from hackers-and that’s what Imperva specializes in! That’s one major positive, and another is management-CEO Anthony Bettencourt took over last August and has turned the firm’s top-notch products into hugely accelerating sales and earnings. (In fact, Imperva lost 203 contracts to IBM from 2010-2014, but it’s now gotten back 40 of those deals this year alone, including a few huge ones.) Imperva’s third-quarter report was a tremendous blowout, with sales and earnings miles ahead of estimates and strength seen in both products and subscriptions; analysts now think profits will total 31 cents per share next year (up from a prior estimate of a loss before the report), but we think that is likely to be very conservative. There’s a lot to like here…”

Since the stock gapped up on those terrific results, IMPV hasn’t done much. But I view that as a positive given what has happened in the market. Compared to huge, well-known, stagnant stocks, IMPV has a lot of potential for improved perception-about 330 mutual funds own shares, so there’s solid sponsorship, but that figure can double or triple if management delivers huge earnings beats in the quarters ahead.

I think you could buy a small position in the stock here, but the key will be how you handle it. For that, I suggest giving Cabot Top Ten Trader a try-you’ll get specific buy and sell points, follow-up advice and, of course, recommendations in which investor perception is on the rise!

Sign up for your no-risk trial today.


Michael Cintolo
Chief Analyst, Cabot Growth Investor and Cabot Top Ten Trader


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