Time For Growth Stocks Like Apple and Google?

by: Larry MacDonald September 15, 2008 | about stocks: AAPL / GOOG    
Larry MacDonald

Larry MacDonald

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One of the inefficiencies in the stock market may be a tendency for investors to give growth companies too much credit during economic upturns and not enough during economic downturns. That is, they fail to differentiate between growth tied to the company’s business model and growth tied to the economic cycle.

During business upswings, when cyclically enhanced earnings are more likely to beat financial expectations, investors develop an inflated view of the growth company’s long-term growth prospects and bid the stock up to high levels. But when the economy turns down, the cyclical component of earnings fades and precipitates negative earnings surprises, doubts about the company’s model, and dramatic sell-offs in shares.

The best time, then, to build positions in solid growth companies like Google (GOOG) and Apple (AAPL) may be during slowdowns in the economy like now. Their stocks are selling off thanks in large part to earnings disappointments related to cyclical factors. But their underlying business models are still intact and ready to emerge stronger than ever when the economy recovers.

The latest quarterly results for both Google and Apple came in under expectations, and so their stocks were dragged down. The next few quarters may see more disappointments in financial results as the economy continues to wilt, presenting accumulation opportunities for investors with long-term views.

An Investing Ideas post on March 20 discussed buying Google when the stock was trading at $433. The shares subsequently climbed to $600 but then fell back, and today touched $433 in intraday trading.

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This article has 6 comments:

  •  
    Sep 15 03:58 AM
    Except if inflation increases and multiples contract, GOOG and AAPL would be hurt badly.
    Reply | Link to Comment
  •  
    Sep 15 05:23 AM
    In July Apple earned $1.19 vs the expected $1.08 beating by 10%.
    In July Google earned $4.63 vs the expected $4.74, missing by 2%.
    All indicators point that Apple will have another growth quarter, at least in revenues. I would expect the company to keep on growing in the short and long term, even though the stock price may stagnate until optimism returns to the market.
    Reply | Link to Comment
  •  
    Sep 15 10:11 AM
    i'm happy to see Apple recognized as a growth stock. good article.
    Reply | Link to Comment
  •  
    Sep 15 10:26 AM
    OK. But there is an extremely attractive buying opportunity presenting itself shortly...
    Reply | Link to Comment
  •  
    Sep 15 11:58 AM
    Inflation will come under control as drilling for oil off shore comes on line. As the price of oil plummets, which it will, regardless, of the propagandists of the left’s protestations, prices of fuel, food, clothing, plastics, et al will follow a similar downturn and the economy will boom. It doesn't take a financial genius to see this scenario emerging.

    Only Democrats, radicals, and wacko environmentalists will deny the reality of Drill Here, Drill Now, Pay Less. Of course, their little world of political correctness will, suddenly, explode and they will be covered with the debris of their denial of reality and ignorance of macroeconomics. However, they will never shut their mouths and stop their efforts to destroy the capitalist foundation of our democracy. We must remain ever vigilant.

    If the Republicans make a huge comeback in November, prosperity will reign supreme. If the ideologues of the left convince the electorate that socialism is a better alternative to representative democracy and capitalism, there is no hope for this nation. This election will be the most important that most of us will ever see. Vote wisely not ideologically!
    Reply | Link to Comment
  •  
    Sep 15 12:35 PM
    Prophecies of Armageddon based on which party makes it into office are just silly. The only important issue is that normally the market responds well in an election year. Note that I said 'normally'. Bespoke had a nice chart of this effect a couple of weeks ago. I'd also like to say that as a life-long Republican, it's also really hard to ignore the 'fact' that under Democrats, we tend to run a positive bank balance, whereas under Republicans, we seem to go crazy with our credit cards. I suspect that just means that the term 'Democrat' or 'Republican' has less to do with reality and more to do with perception. Lets face it, what has the last administration done that they will be proud of retrospectively? Are you feeling better financially under Bush? How's your home value? Is your job more or less secure. Do we have more or less stature in the eyes of the rest of the world... I think you get my drift.....

    jegan
    Reply | Link to Comment
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