Also referred to as “corporate earnings” and “company earnings:” basically, the amount of money a company makes in certain period of time. The price/earnings multiple is still the most common tool used to value a company. The stock market values a company based on the amount of money—the earnings and profits—the company has after all expenses, including taxes, have been paid. In a stock market where stocks are traded at an average of 12 times earnings, a company making $1.00 a share per year would be valued at $12.00. All things being equal, the more money a public company makes, the higher its stock price.
As I have talked about many times before, investing in companies that can grow corporate profits over the long term is essential when it comes to becoming a successful investor. Sometimes, though, it does pay to be a contrarian and go against the herd.
One sector that has been hit hard lately is technology stocks. Technology stocks, especially those that build hardware for personal computers (PCs), have seen corporate profits erode substantially over the past decade.
After a shift by consumers toward tablets and smartphones, the technology stocks that have not been able to adapt to these new product forms have seen a gradual but significant drop in corporate profits. The question to ask: is a turnaround possible?
The latest data indicate that technology stocks in the PC sector will face significant headwinds. For the first quarter of 2013, global PC shipments declined 13.9% compared to the same quarter in 2012, according to research firm International Data Corporation (IDC). (Source: “PC Shipments Post the Steepest Decline Ever in a Single Quarter, According to IDC,” International Data Corporation web site, April 10, 2013, last accessed April 19, 2013.)
This is the worst drop year-over-year for PCs since IDC began tracking the market in 1994. This is also not an aberration, since the market has now witnessed four consecutive quarters of declines.
However, since technology stocks in the PC sector have sold off dramatically, is it possible that these stocks now offer a value trade? The recent takeover attempt on Dell Inc. (NASDAQ/DELL) might shed light on this question.
There have been several interested parties looking to take Dell private. However, recent … Read More
When it comes to new regulations, many investors should rightfully worry about how this will affect them. At the same time, there might be an investment opportunity in the making. While some firms will certainly have lower corporate profits with increased regulation, there are some companies that can take this investment opportunity and generate greater returns over the long run.
New rules are being designed for the swaps market, to avoid a situation similar to what happened in 2008. Swaps are a huge market, and since the deals are conducted over-the-counter (OTC), the financial system had problems when a counter-party couldn’t pay for their trades. Having swaps trade on exchanges that are guaranteed by a central clearinghouse will eliminate this risk and lower the chances of any financial crisis erupting from counter-party risk in the future.
The problem is that, because margin requirements are tougher, corporate profits will be lower for some companies, as a firm can only take on lower levels of positions. Also, the banks were the main intermediaries for OTC trades and a center for large corporate profits for many years. These trades will now be transferred to the stock exchanges, giving them a great investment opportunity to generate higher corporate profits from additional products that are now traded on their venue.
One company that should benefit over the long run is CME Group Inc. (NASDAQ/CME). This group encompasses the widest range of futures and options traded in America and, as we see more products going through exchanges, we should see higher volume levels for this firm. The shifting of OTC trades from the banks to the … Read More
Marissa Mayer, the new CEO of Yahoo! Inc. (NASDAQ/YHOO), recently spoke about her plans for the future of the company. As we all know, technology stocks in this sector are constantly evolving. At one time, Yahoo! was a giant among technology stocks; those days have long since passed. Growth in corporate profits has been evasive for the firm, and Mayer took this opportunity to voice her opinion on where the company should be heading.
Mayer comes from Google Inc. (NASDAQ/GOOG) with an engineering background. She helped build the Google brand and, ultimately, drive corporate profits. While her success at Google is laudable, the long-term problems at Yahoo! still exist. She’s starting at the beginning and announced a dramatically redesigned homepage. She believes that this, along with changes to the search and e-mail functions, will help attract more viewers to Yahoo! and, ultimately, raise corporate profits.
Her plan includes a greater focus on its mobile platform. All technology stocks and their investors are spending a lot of time scrutinizing mobile platforms. This segment will be a crucial push for the next leg of higher corporate profits. The number of smartphone users is growing, and this segment will be critical to the success of technology stocks over the next decade. Technology stocks that can’t convert users into corporate profits will most likely see their shares languish.
Mayer also spent some time discussing the need to attract talent. I’ve lamented on this topic before; once technology stocks start to fall behind, the best talent starts to leave. As innovation is the key driver for corporate profits growth in this industry, technology stocks need … Read More
Yahoo! Inc. (NASDAQ/YHOO), one of the former leading technology stocks, has been plagued with a stock price that just hasn’t moved for quite a long time, as opposed to several other technology stocks that have had significant price appreciation. Not only have corporate profits been evasive for the firm, but there’s also been a scandal recently. Former CEO Scott Thompson had been discovered to have allegedly lied on his resume about having a bachelor’s degree in computer science. This mistake forced him out; Marissa Mayer has just been named as CEO.
A well-known name among technology stocks, Mayer comes from Google Inc. (NASDAQ/GOOG). With an engineering background, she helped build the Google brand and ultimately drive corporate profits. While her success at Google is laudable, the long-term problems at Yahoo! still exist. It will be quite interesting to see if her skills are transferable to more problematic technology stocks such as Yahoo!, which has had issues in generating corporate profits for quite an extended period of time.
This hasn’t been the only change, as the landscape for technology stocks continues to evolve. Yahoo!’s North American division is essentially trading for nothing. Most of the value of Yahoo! USA is built on cash and its stake in Alibaba and Yahoo! Japan. Yahoo! has entered an agreement that will see up to half of its stake in Alibaba sold for $7.1 billion. After taxes, Yahoo! expects to net approximately $4.2 billion and $800 million in preferred Alibaba stock.
Even after this deal and the announcement of a new CEO, the stock has not moved substantially, stuck in a range. This is because … Read More
There are many viewpoints regarding Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE/JPM), some of which have gone south since the situation regarding their multi-billion-dollar loss was announced, related to European credit trades. The real issue for investors should not be a moral one, since no rules were broken, but rather the analysis of the firm in relation to other bank stocks. Where does JPMorgan Chase fit in relation to other bank stocks, and what does the future hold for its corporate profits?
The latest quarterly report on corporate profits places a big spotlight on the fact that JPMorgan is a hugely profitable firm, a giant amongst the bank stocks. While the market sector has experienced volatility, JPMorgan is so profitable that it appears able to weather the storm.
For the latest quarter, the firm took a $4.4-billion loss for the trading losses of its London-based risk department. For many firms that would be a massive hit. For JPMorgan, it translates into a decrease in corporate profits of only 8.7% to just under $5.0 billion, compared to $5.4 billion the previous year. These corporate profits come from revenue of $22.2 billion.
For all of the concerns regarding JPMorgan and other bank stocks regarding some of the questionable trading, it amounted to a tiny slice in the corporate profits for the firm. This speaks volumes to the potential for massive corporate profits over the long term.
But, I would not necessarily jump in yet. Bank stocks could get hit this fall, as the European mess continues to evolve. This unraveling of a continent could cause massive upheaval for the financial … Read More