Investing Caffeine

Dancing Elephants in a Challenging Economy

February 14, 2010 at 11:36 pm Leave a comment

To many, the significant rebound in global equity markets, since the March 2009 price lows, has merely been a dead-cat bounce or simply a temporary “sugar high” from the extraordinary fiscal and monetary measures taken by governments all over the world. John Authers, columnist at the Financial Times, captures that cycnical view in his daily column. He believes we are on the cusp of financial dynamics that will “drive a bear market for another two decades.” Ouch – pretty harsh outlook.

Perception Can Differ from Reality

Throughout much of 2009, the better than anticipated corporate results were rationalized as improvements only coming from discretionary cost-cutting. Well, as of last week, 73% of the S&P 500 companies that reported quarterly results exceeded earnings expectations, with 70% surpassing revenue estimates as well. With the 9.7% unemployment improving (at least temporarily), the recovery cannot solely be attributed to cost-cuts.

In the midst of the economic recovery (+5.7% growth in Q4 GDP), other animals beyond deceased felines have joined the party, including dancing elephants. More than seven million jobs have been lost since the late-2007 recession began, yet a broad set of companies have thrived through this horrible environment. The bubble economy has certainly had a disproportionately negative impact on particular areas of the economy (e.g., housing, credit, and automobiles). However, in the midst of the global credit tsunami that engulfed us over the last two years, the largest global economic engine (U.S.A.) was still churning out about $14 trillion in the sales of goods and services. Many companies that were not reliant on the financial and credit markets used their superior competitive positioning to generate significant piles of cash. Instead of piling on additional debt (or diluting owners through share offerings), certain corporations tightened their belts, invested prudently, and stepped on the throats of other irresponsible and reckless competitors, which were forced to recoil back into their caves and bunkers.

Dancing Elephants

Times are tough, right? If that is indeed the case, let’s take a look at a few elephants that are trouncing the competition, even under extremely challenging economic circumstances:

Apple Inc. (AAPL) – Revenue growth +32% ($182 billion market capitalization):  In the recent quarter, Apple pounded the competition by selling a boatload of electronic goods, including iPhones, iPods, and Mac computers. Next up, the iPad!

Amazon.com Inc. (AMZN) – Revenue growth +42% – ($53 billion market capitalization):  In the fourth quarter ending December, Amazon pulverized peers in a cutthroat holiday by selling lots of Kindles (e-reader), growing +49% internationally, and adding a new Zappos.com shoe and accessory acquisition. Organic revenue growth (ex-Zappos) was still incredibly strong at about +23%.

Corning Inc. (GLW) – Revenue growth +41% – ($28 billion market capitalization): Results were buoyed by demand for its liquid crystal display (LCD) glass as consumers continued purchasing LCD televisions, laptop computers, and other electronic devices. In addition, GLW experienced a resurgence in demand for its emissions control products as the auto industry rebuilt supply. Telecom orders in China were solid also.

Google Inc. (GOOG) – Revenue growth +17% – ($169 billion market capitalization):  In addition to the growth in the global search advertising market and YouTube video platform, Google also accelerated the deployment of their mobile platform, including their Android cell phone operating system, and concentrated on the expansion of the display advertising market.

Gilead Sciences Inc. (GILD) – Revenue growth +42% – ($42 billion market capitalization): Growth was catapulted by GILD’s dominant HIV/AIDS product franchise, including Atripla, Truvada, and Viread. Pulmonary arterial hypertension drug Letairis and chronic angina treatment Ranexa also contributed to stellar results.

Intuitive Surgical Inc. (ISRG) – Revenue growth +40% – ($13 billion market capitalization): This cutting-edge surgical equipment manufacturer enjoyed robust expansion from continued robotic procedure adoption and higher da Vinci Surgical System sales.

Intel Corp. (INTC) – Revenue growth +28% – ($113 billion market capitalization): The company’s semiconductor sales growth was fairly broad based across its major segments (Data Center, Intel architecture, Atom Microprocessor/Chipset) as demand recovered and depleted inventories were replenished globally.

Netflix Inc. (NFLX) – Revenue growth +24% – ($3.5 billion market capitalization): Netflix added more than one million new customers in the quarter as they continued to eat Blockbuster’s-BBI (and other competitors’) lunch. In addition, the company’s streaming “Watch Instantly” service continues to gain traction.

Although I do currently own a few of these companies, do NOT interpret this partial list of companies as “buy” recommendations – in fact, some of these stocks may be excellent “short” ideas. Regardless of how sexy growth may be, investors should never ignore valuation (read more about valuation). As stated at the beginning of the article, I mainly want to emphasize that trillions of commerce dollars are being transacted, even in demanding economic times.  It just goes to show, one can turn lemons into lemonade. Or said differently, even elephants can be trained to dance.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, AMZN, and GOOG, but at time of publishing had no direct positions in GLW, GILD, ISRG, INTC, BBI, and NFLX. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Financial Markets, Stocks. Tags: AAPL, AMZN, challenging economy, GILD, GLW, goog, growth, INTC, ISRG, NFLX.