Twitter (TWTR) and LinkedIn (LNKD) – perhaps two of the most “un-ownable” stocks on the market today offered terrible outlooks in their calendar first-quarter reports. Frankly, we’re not surprised. Wall Street is off its rocker with their valuations. We put the largest fair value bands in our coverage on these two stocks, and we wouldn’t touch either one with a ten-foot pole.
Investors are reeling. LinkedIn is down ~20% on Friday, and Twitter has dropped more than 20% from earlier this week, to under $40 per share. We’re not harping on these stocks because they are speculative and unproven. That’s a given. We’re bringing this to your attention because we just don’t see the investment case in either one. Their normalized revenue, earnings, and free cash flow expectations, which drive the fair value estimate, are near impossible to predict. Look at how far off analysts were in forecasting LinkedIn’s expected profit for this year in 2015 ($1.90 per share versus $3.03 consensus). That’s a huge miss!
True investors (i.e. those looking for valuation mis-pricings, long-term wealth and income growth — not speculators) simply have better quality companies with more predictable free cash flow streams to choose from – sorry Twitter and LinkedIn. We can’t handle the swings in these stocks, and neither can most hedge funds, which probably lost their investors a lot of money by ignoring tried-and-true valuation techniques. For more reading about the valuation enigma related to Twitter, click here. We’re sorry for wasting your time talking about these two media-hyped stocks, but we see value in letting others know of the tremendous uncertainty related to an investment in either. Perhaps they’ll avoid both like the plague.
In other news, we received some decent reports from Best Ideas portfolio holdings Visa (V) and Gilead Sciences (GILD). Visa has been in the news lately on its robust growth prospects in China, and we were generally pleased with the company’s quarterly performance. We were, on the other hand, ecstatic about Gilead’s quarterly results. The hepatitis-C giant’s revenue advanced more than 50% in the quarter, handily beating consensus expectations by nearly $700 million, while earnings per share of $2.94 was more than $0.60 better than the consensus view. Can you say a blowout (not that we concern ourselves with quarterly earnings though)? The story is far from over, and we continue to value shares far greater than the $104 mark they are currently trading at. View Gilead’s landing page here.
In case you haven’t been to the website recently, we’ve rolled out a number of ETF reports from Consumer Discretionary to Technology and beyond, and we have more in store. You can access the reports by selecting ‘Click to Access Report’ here. Within each ETF report, we provide in-depth analysis and offer insights to help investors stay on top of key trends impacting exchange traded funds and their underlying industries, companies, and commodities. From evaluating the real estate cycle in REIT-focused ETFs to assessing the business dynamics of top holdings within consumer discretionary ETFs, for example, we focus on relevance and leave nothing important to the investment decision-making process out. We hope you agree! Many love the more comprehensive format.
Lastly, we’ll be releasing the May edition of the Dividend Growth Newsletter this coming Monday, May 4. Please expect it in your inbox at that time. If you haven’t had a chance to read the audit analysis of the Best Ideas portfolio, it’s certainly worth a read. It can be found here. The latest Financial Advisor publications can be downloaded here. Please let us know if you have any questions.
Wishing you health, happiness, and a wonderful weekend!
Brian Nelson, CFA
President, Equity Research
Valuentum Securities, Inc.
brian@valuentum.com