MONEY stocks

What Airline Stocks Tell Us About the Rest of the Market

airplane window view above the clouds
Getty Images

A century-old market timing strategy known as Dow Theory views the rally in airline stocks as a bullish sign, but investors need to approach the transportation sector with skepticism.

High oil prices. Fee-weary passengers. A global economy that’s still not firing on all cylinders. And geopolitical crises forcing carriers to re-route their flights.

Given these recent developments, you’d think that airlines stocks would be struggling of late.

But you’d be wrong. Airline stocks have been among the best performing groups in the U.S. stock market recently, with the Dow Jones U.S. airline index up nearly 75% over the past 12 months.

^DJUSAR Chart

^DJUSAR data by YCharts

In the short run, this trend is likely to continue, especially if airlines keep posting strong results. On Tuesday, Delta Airlines reported that revenue grew more than 9% in the recently ended quarter, versus the same period last year. The carrier also reported earnings per share of $1.04, versus consensus forecasts of around $1.02 a share.

But what of the long run?

One of the most enduring market-timing strategies on Wall Street would seem to point to blue skies ahead—and not just for airline and transportation stocks.

Dow Theory, the brainchild of Charles Dow, the founder of The Wall Street Journal, is one of the oldest technical indicators that’s still used by investors to gauge future stock market movements. Dow Theory has many technical layers, but in broad strokes the strategy seeks to verify trends in the Dow Jones Industrial Average by looking at the Dow Jones Transportation Average.

The idea is that stocks tend to rise when the economy is humming. And to tell if that’s the case, you need to see not only that factories are on the upswing (as measured by the Dow Industrials), but that transportation companies that are paid to move manufactured goods out of those factories are also on a roll. Hence the need to study the Dow Transports.

Recently, the airlines haven’t been the only transports rallying. Shares of railroads and trucking-related companies have also been on the rise:

^DJUSAR Chart

^DJUSAR data by YCharts

This explains why both the Dow Industrials and Dow Transports are at or really close to their all-time highs:

^DJT Chart

^DJT data by YCharts

Still, it’s important to understand that transport stocks have been soaring for more than five years now, as investors have been anticipating an improved economy ever since 2009.

The result is the bull market in transportation is getting long in the tooth. Meanwhile, valuations for many of these companies, including the airlines, are soaring.

As you can see below, while the broad market trades at a price/earnings ratio of around 17 or 18, many airline stocks — such as Southwest , United Continental , JetBlue , and Spirit — trade at significantly higher P/E ratios.

LUV PE Ratio (TTM) Chart

LUV PE Ratio (TTM) data by YCharts

The bottom line: This may be a time when it makes more sense to look at the fundamentals of each individual company, rather than at the technical trends for the airlines or transports as a whole.

MONEY stocks

The Spoiler Lurking in Netflix’s Blockbuster Growth

Woman watching Netflix on iPad
courtesy of Netflix

Rather than crow about its strong quarter, the streaming-video giant tempered expectations for the remainder of the year. That should tell you something.

At first blush, Netflix reported what seemed like blockbuster results.

On Monday, the streaming video giant said its earnings had more than doubled, to $71 million or $1.15 a share in the recently ended second quarter. Even better, Netflix gained 570,000 new streaming subscribers in the U.S., despite hiking costs by $1 a month in May, moving the company past the 50 million-subscriber mark.

Yet rather than spending much time crowing about these results, Netflix officials used its quarterly earnings report to try to temper investors’ expectations for the coming quarter. Why?

Either second-quarter results weren’t that great after all — or the rest of the year will be much more challenging than expected.

It’s the latter.

A few months ago, Morningstar analyst Peter Wahlstrom made this key point:

“The market is too optimistic about Netflix’s future sales growth and profitability potential. We remain skeptical about Netflix’s aggressive international push; we recognize the addressable market is large but sustainable and material profitability will be much harder than management currently anticipates and may drag on cash flow for the foreseeable future.”

He was right to be worried. On Monday, Netflix provided a clue as to how difficult it will be to sustain profitability while making an aggressive international push.

In a letter to shareholders, CEO Reed Hastings and chief financial officer David Wells warned that the company’s international video streaming operations, whose “contribution losses” had been gradually declining lately, would jump from $15 million in the second quarter to $42 million in the third quarter.

Meanwhile, they lowered expectations for third quarter earnings, forecasting that they would come in around 89 cents a share, down from $1.15 in the second quarter and considerably lower than the expected $1.02 a share, according to consensus forecasts by analysts tracked by Zacks.com.

Company leaders also used their earnings release to again reiterate their calls for so-called net neutrality, hinting at another area of potential vulnerability. Backers of net neutrality want Internet Service Providers (ISPs) such as Verizon, Comcast, and AT&T to treat all data equally, without giving preferential treatment — and speed — to preferred customers.

Without such a system, companies like Netflix have had to address speed issues by entering into individual agreements with ISPs to stream their content more quickly. The problem, though, as MONEY’s Taylor Tepper recently pointed out, is that such deals give “Internet service providers leverage to assess more such ‘tolls’ down the road.”

Yesterday, in after-hours trading, Netflix shares jumped immediately after the company announced its earnings.

NFLX Price Chart

NFLX Price data by YCharts

But this morning, skeptical investors are starting to voice their concerns. So don’t be surprised if today, after digesting the actual details, the market reacts in a slightly different way.

MONEY stocks

What the Financial Press Isn’t Telling Us About Google and Other Tech Companies

Google on iPhone 5
Iain Masterton—Alamy

The search engine's ongoing struggles in mobile highlight problems cropping up throughout the tech sector — yet you wouldn't know it by the reactions of investors and the media.

This was an awful week for tech, as many of the sector’s biggest names announced disappointing results that point to slowing growth and troubled strategies.

Yet you wouldn’t know it by how the markets — or the media — reacted this week.

Late Thursday, the search engine giant Google reported the amount of money that advertisers are willing to pay whenever someone clicks on an online ad continues to fall. So-called “average costs per click” for Google fell 6% in the quarter, compared with the same period a year earlier. This continues a trend that’s been going on for some time. In the first quarter, for example, costs per click sank 9%.

There are two explanations for why this is happening and neither is good news for Google. One is that online sites are increasingly being viewed through mobile devices such as smart phones and tablets, and mobile ad platforms are not paying the premium that traditional web ads have. The other reason is that Google is no longer the only game in town when it comes to online advertising, and Facebook’s recent efforts to boost its mobile presence are clearly succeeding.

Yet instead, most news accounts focused on the rosier parts of Google’s quarterly results, such as the fact that overall revenues grew 22%.

The same thing happened all week throughout the sector:

* eBay

On Wednesday, the online auction site reported sales that fell short of the Street’s expectations. In fact, on a quarterly basis, revenues have been flat for several quarters. Instead, headlines focused on profits meeting consensus forecasts.

* Yahoo

The portal, which is making a huge push to try to be a big player in online advertising, reported on Tuesday that display ad revenues declined. Yet instead, many publications focused on how Yahoo’s mobile efforts were improving or that the company was going to sell a smaller-than-expected stake in Alibaba, the giant Chinese online retailer and auction site that is expected to go public later this summer.

* Intel

Intel shares hit a decade-high after releasing earnings results on Tuesday that showed better-than-expected PC sales expectations and overall revenue growth. As Reuters reported, chief financial officer Stacy Smith said “PC sales had stabilized, easing fears about the four-year decline in computer sales as consumers turn increasingly to tablets and smartphones.”

Great. That means the dying part of the industry is dying a little less rapidly than was previously thought. Meanwhile, investors glossed over the fact that revenues for the mobile and communications chip group sales were down 67% compared with the prior quarter and off 83% versus last year.

* Microsoft

The company announced the biggest layoffs in its history on Thursday, cutting its workforce by 18,000 — many of those coming from its recently acquired Nokia division. As MONEY’s Ian Salisbury reported, the historic cuts show how far this once-dominant tech company has fallen as it struggles to find its place in the sector. Yet many sites looked at the situation as glass-half-full, noting how the stock was rising on news that Microsoft was retrenching.

Of course, that’s what happens when investors fall in love with a particular group of stocks that have collectively posted a better-than-expected run. They start viewing those shares through rose-colored glasses.

MONEY stocks

7 Marijuana Stocks for a Buzzworthy (But Risky) Pot-folio

Agricultural Facility Recent Planting, Medical Marijuana Inc.

With marijuana legalization riding high, investors are looking for ways to play the trend. So far, though, even the biggest companies in this green rush have yet to turn a profit.

Earlier today, pot went on sale legally in Washington state for the first time ever, following in the footsteps of Colorado. A day earlier, New York became the 23rd state to permit the use of medical marijuana.

Throughout the country, marijuana legalization is going ganja-buster — leading many to wonder how they can profit from this trend.

Several private equity funds recently launched to invest in marijuana-related companies and startups, including one led by none other than the bobo bible, High Times magazine.

But what about retail investors? You’d think that the mutual fund and exchange-traded fund industries would have jumped on this green rush already. After all, there are specialty ETFs that let investors bet on such niche trends as fertilizer, fishing, and even water. But so far such an investment vehicle remains a pipe dream.

In the absence of a simple, off-the-shelf fund, investors can turn to individual equities. But be careful: Many stocks that are trying to ride the Pineapple Express are tiny micro-cap companies or penny stocks that are quite volatile and risky. Moreover, regulators have begun warning investors to watch out for pot-related “pump-and-dump” schemes, in which speculators talk up a stock and then sell before their inflated projections lose air.

In the Ganja universe, here are some of the biggest companies, based on market value, with their strategies and risks highlighted. Keep in mind that all of these “big” marijuana stocks are actually shares of tiny, still-profit-less companies.

GW Pharmaceuticals (Ticker: GWPH; share price: $92.60; market value: $1.4 billion)
Strategy: Cannabis-based pharmaceuticals. The company’s Sativex is already being used in several countries to treat spasticity related to multiple sclerosis. GW is also working on a treatment for severe childhood epilepsy based on cannabis extract.
YTD Performance: +132.3%
2013 Performance: N/A
2012 Performance: N/A
Profitable: No
Valuation: Price/sales ratio: 29.0 (S&P 500’s P/S ratio: 1.8)

Medbox (MDBX; $17.75; $537 million)
Strategy: Dispensary services. The company manufacturers self-service kiosks that dispense
medicines including marijuana.
YTD Performance: —0.3%
2013 Performance: —70.1%
2012 Performance: +4,819.4%
Profitable: No
Valuation: Price/sales ratio: 77.5

Cannavest (CANV; $11.37 $381 million)
Strategy: Makes and markets cannabis related products, including hemp oil.
YTD Performance: —60.0%
2013 Performance: +470.0%
2012 Performance: +150.0%
Profitable: No
Valuation: Price/sales ratio: 44.8

Advanced Cannabis Solutions (CANN; $7.50; $101 million)
Strategy: Leases growing space and related facilities to licensed marijuana business operators.
YTD Performance: +138.5%
2013 Performance: +221.8%
2012 Performance: —99.0%
Profitable: No
Valuation: Price/sales ratio: N/A

Medical Marijuana (MJNA; $0.20; $105 million)
Strategy: A holding company with diversified businesses ranging from consumer products to services, including security and surveillance for cannabis-related businesses.
YTD Performance: +27.1%
2013 Performance: +53.5%
2012 Performance: +512.1%
Profitable: No
Valuation: Price/sales ratio: N/A

GrowLife (PHOT; $0.10; $81 million)
Strategy: A marijuana equipment maker that sells hydroponic gardening gear.
YTD Performance: —27.8%
2013 Performance: +308.1%
2012 Performance: —75.3%
Profitable: No
Valuation: Price/sales ratio: 11.4

Cannabis Sativa (CBDS; $6.40; $75 million)
Strategy: The former sun-tanning company is pushing into the marijuana industry, producing cannabis-based oils and edibles. Its new CEO is Gary Johnson, the former Libertarian Party presidential candidate and a two-term governor of New Mexico.
YTD Performance: +990.0%
2013 Performance: —11.0%
2012 Performance: +12.4%
Profitable: No
Valuation: Price/sales ratio: 1000.0

MONEY Investing

Are You On Your Way to $1 Million? Tell Us Your Story.

There are many ways to build lasting wealth. MONEY wants to hear how you're doing it.

The number of millionaires in America hit 9.6 million this year, a record high and yet another sign that the wealthy are recovering from the Great Recession, thanks in large part to stock market and real estate gains.

Are you on target to join their ranks? Are you taking steps—through your savings, your career decisions, your investments, or your rental properties—to make sure that by the time you retire your net worth will be in the seven figures? MONEY wants to hear your story.

Related: Where Are You On the Road to Wealth?

There are many paths to that kind of wealth, and they don’t necessarily involve a sudden windfall, a big head start, or a six-figure salary. You can build up a million or more in assets through steady saving, a sensible approach to investing, modest real estate holdings, or a winning small business idea. Are you finding ways to boost your savings at certain point of your life, like when the kids are out of school or the mortgage is paid up? Are you planning to take more or fewer risks with your investments as you near retirement? And if you invest in real estate, do you find that owning even one or two rental properties is enough to achieve prosperity?

Got a story like this to share? Use the confidential form below to tell us a bit about what you’re doing right, plus let us know where you’re from, what you do for a living, and how old you are. We won’t use your story unless we speak with you first.

MONEY stocks

3 Reasons to Care That the Dow Just Hit 17,000

Trader Peter Tuchman jokes with a handmade "Dow 17,000" cap
Trader Peter Tuchman with a handmade "Dow 17,000" cap as he works on the floor of the New York Stock Exchange . Richard Drew—AP

Reason 1: When this rally began in March 2009, the Dow was more than 10,000 points below where it stands today.

What’s the significance of the Dow Jones industrial average hitting 17,000 — as it did Thursday morning, shortly after the government reported that job creation in June was stronger than expected and that the unemployment rate is down to 6.1%?

Well, truth be told, it’s not that big a deal — but it does show…

… just how far this bull market has come. When this rally began in March 2009, the Dow was more than 10,000 points below where it stands today.

… just how fast this bull is moving. It took less than four months for the Dow to go from 16,000 to 17,000.

… and that Jeremy Siegel was right. In 2012, at a time when the Dow was still below 13,000, he predicted that the world’s most-famous stock market benchmark would get to 17,000 by the start of this year. So he was only off by about six months.

The University of Pennsylvania finance professor — who gained fame with his 1994 book Stocks for the Long Run, the “bull market bible” — has long been viewed as Wall Street’s eternal optimist. But being called a perma-bull by a bunch of business journalists isn’t exactly a compliment.

What can you expect? As a group, journalists are far more likely to be pessimistic than optimistic. And we try to be as contrarian as possible. Hence, when it comes to stocks, which over time are likely to rise more often than they fall, we tend to lean toward predictions of doom and gloom over blue skies ahead.

This may help explain why Siegel has been unfairly lumped in with authors who unwisely made such famous predictions as Dow 36,000, Dow 40,000, and Dow 100,000.

And this is why journalists have tended to favor the opinions of Siegel’s colleague and long-time friend, Yale economist Robert Shiller.

Shiller, who recently won the Nobel Prize, has gotten plenty of credit for having predicted the bursting of the tech bubble in 2000. It didn’t hurt that his book, Irrational Exuberance, came out in March 2000, which was exactly the start of the bear market that sent equities into a “lost decade” that lasted until March 2009.

It should be noted, however, that back in 2012 — when a key gauge of market valuations popularized by Robert Shiller was flashing a bearish warning sign — Siegel publicly predicted that stocks would keep climbing higher.

He based this on the belief that in a low-interest rate environment, stocks should trade at a price/earnings ratio of around 18, based on future estimated corporate profits. And that’s how he came to the 17,000 figure. (By contrast, Shiller prefers to value the market based on actual “normalized” or averaged earnings over the past 10 years.)

Of course, some market observers now believe that with the labor market strengthening, the Federal Reserve may have to start raising interest rates sooner than expected to stay ahead of inflation. And that could mean that stocks aren’t assured of staying above the 17,000 threshold.

Nevertheless, this doesn’t take away the fact that in an April 2012 interview with CNBC, Siegel said there was a 75% chance that the Dow would close 2013 above 15,000, and the odds were 50-50 of getting to 17,000.

A few months later, he went back on CNBC and reiterated his predictions. This time, he offered his assessment of the risks in the market.

“There are two major factors that are depressing our market 1,000 to 1,500 points,” he said on air. The first, he said was the fiscal cliff negotiations taking place in Washington, which had the potential to send the economy back into recession. The second was that monetary policy needed to become more aggressive and creative. This was before the Federal Reserve launched the most recent round of so-called quantitative easing.

After the fiscal cliff was avoided and the Fed got more creative with its stimulative bond-buying program, the markets really took off. In fact, here’s how the Dow has performed since the Fed began its third round of quantitative easing on Sept. 12, 2012:

^DJI Chart

^DJI data by YCharts

Soon after, he set 17,000 as his actual price target for the Dow by the end of 2013.

Today, based on modest earnings growth for U.S. corporations, Siegel says the Dow is likely to get to 18,000 sometime in 2014.

Of course, that’s not such a bold forecast when you consider that going from Dow 17,000 to 18,000 represents less than a 6% jump in prices.

Still, it doesn’t negate the fact that calling Dow 17,000 two years ago — when Europe was mired in a debt crisis, Washington was threatening to go off the fiscal cliff, and the Shiller P/E was flashing a warning — was pretty daring.

MONEY stocks

These 5 Tweets Explain Why Twitter Stock Isn’t About to Rebound

Twitter logo on iPhone
Scott Eells—Bloomberg/Getty Images

The social media stock is quickly maturing before our eyes. And that's not music to investors' ears.

It’s no secret that Twitter shares have had a rough few months, marked by a wave of analyst downgrades, insider selling following the end of the stock’s lock-up period, and now signs of slowing growth.

The real question is: Which of the charts below represents the market’s true take on the stock?

This one, which shows how Twitter shares cratered from late December to late May?

TWTR Chart

TWTR data by YCharts

Or this one, which shows how the stock has rebounded from its late May lows?

TWTR Chart

TWTR data by YCharts

The Twitter bulls argue it’s the latter. But here are five reasons — articulated on Twitter by my MONEY colleague Taylor Tepper — that I’m not inclined to believe them:

1)

Sure, that was bound to happen as the social media platform gained in size. There are already 255 million Twitter users worldwide.

However, the fact that the company’s rate of growth is slowing so noticeably — it is expected to fall from an annual pace of 24% this year to 15% two years from now and then to less than 11% in 2018, according to a study by eMarketer — is becoming worrisome.

“We can’t deny that growth in users has been slowing,” says Morningstar analyst Rick Summer, which is a critical point given that “the company is competing for advertising dollars with juggernauts such as Facebook and Google.”

2)

For most companies, the fact that the lion’s share of growth is coming from rapidly developing Asia — and specifically China — would be viewed as a bullish sign. In the case of Twitter, though, which generates nearly 90% of its overall revenues from ad sales, this isn’t necessarily good news for near-term profitability.

Remember that in online ads, the big money is still made in the developed world. Yet in Twitter’s case, the percentage of the company’s users that are in North America and Western Europe is expected to slip to only one third by 2018, down from nearly half in 2012, according to eMarketer.

3)

Twitter officials often point to how much advertising revenue the company is generating per thousand “timeline views,” which is sort of like Twitter’s version of a web page view. In its most recent quarter, the company touted that “advertising revenue per thousand timeline views reached $1.44 in the first quarter of 2014, an increase of 96% year-over-year.” That’s true.

But they played down the fact that the overall number of timeline views for the quarter — 157 billion — was actually below the peak of 159 billion achieved last year. This, despite the fact that the overall user base continues to grow.

4)

Social media is all about buzz. Advertising, which most social media companies need if they hope to turn a profit, is all about scale. And right now, Twitter’s user base pales in comparison to that of Facebook, with its 1.3 billion users. In fact, Google+ and LinkedIn, with their 300-million-plus users, are even bigger than Twitter.

5)

About a year and a half before Twitter went public, Facebook made news by buying the mobile photo sharing app Instagram for $1 billion. Seems like chump change compared to the $24 billion that the stock market says that Twitter is worth, based on its current market capitalization.

Yet Facebook CEO Mark Zuckerberg recently provided numbers showing that Instagram is closing in on Twitter, with more than 200 million monthly active users worldwide.

More importantly for mobile ads, more Americans are using Instagram on their smartphones than are using Twitter — by eMarketer’s count, 40.5 million for Instagram versus 37.3 million for Twitter. And by many accounts, Instagram is now a key engine in Facebook’s ad strategy, particularly in China.

Which begs the question: Which price is more accurate — the $1 billion that Zuckerberg paid for Instagram, or the $24 billion that the market says Twitter is actually worth?

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