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The Nasdaq 100 index, made up of the 100 biggest nonfinancial stocks traded on that exchange and the basis for the popular PowerShares QQQ exchange-traded fund (ticker: QQQ), has a combined stock-market value of $2.7 trillion. The cash and investments on Apple's (AAPL) books alone amount to nearly 4% of that value -- never mind the stupendous earning power of the company itself, evident in last week's gaudy profit report (see Tech Trader column for more on this).
The net cash held by the top eight companies in the index, which together make up half of this so-called NDX index, comes to nearly 10% of the benchmark's total market capitalization. In essence, the market is saying that these outfits -- essentially the greatest technology innovators of the past two generations -- are worth at least one-tenth as much dead as alive. And the modest P/Es most of these companies sport indicates that investors certainly aren't placing an inflated value on their businesses.
The purpose of this recitation of corporate riches is not to assert that very large tech stocks are a bargain, though they are priced at no premium at all to the broader market, even after the NDX has risen to its highest point in 11 years. Indeed, it seems that any analyst pitching a stock these days should have to explain how it passes the "Apple test." Apple now trades below 11 times consensus profit forecasts for the next four quarters. Find clients a better company trading cheaper.
No, the sharper point here is that when cash piles up high enough, the market simply will not pay up for it. This isn't only because cash yields next to nothing today, but because at a certain point nothing productive or value-generating can be done with it.
Could Apple possibly find something smart to do with $97 billion over the typical investor's time horizon, even with management's proven ability to "Think Different"? The best that could be hoped is that the company does nothing silly with it, or begins distributing some of it to shareholders in a disciplined way, most likely through sizable dividends. And when a company gets as large as Apple is, which takes the prospect of a buyout or some kind of leveraged recapitalization off the table, the cash is just ballast, inert evidence of past success rather than fuel for tomorrow's progress.
But wait, the tech purists will answer, technology investors don't much care about dividends, only product cycles and brilliant engineering marvels. Just look at Microsoft (MSFT), which initiated a dividend in early 2003. Its stock has done little since then, hasn't it?
Well, yes, the stock's done little, spending most of the past eight years in the high 20s, but shareholders have received a steadily increasing flow of cash as they've waited for the engineers in Redmond to catch some more lightning in their bottles, and as the shares have gotten increasingly cheaper.
JANUARY ENDS, THE SUPER BOWL APPROACHES, and market pundits make much of what the year's first month means for the next 11.
Some good and necessary work has been done in debunking the idea that the first trading days of the year have magical predictive powers. A lot of those old almanac studies seem to come down to: "Strong years are made up of strong months, and strong months of strong weeks, and vice versa."
Not particularly helpful.
And, as noted here last week, it seems that a bit of overconfidence is slowly washing over the mass of active investors lately, even if the positive money flows into equity funds in recent weeks are a welcome sign for the bulls.
This is the point in the winter when the seasonal tail winds abate. February, on average, is among the weaker months. And yet, it must be noted that, whatever stall or tumult or pullback awaits in the short term, when the initial weeks of a calendar year have been as strong as this year's have been, those years tend to belong to the bulls.
As of Friday's close, the Standard & Poor's 500 was up 4.7% this year. Since 1953, nine prior years had a 4% or greater gain through Jan. 23. In each, the index finished positive, with further gains over the remaining 11 months, with one important exception: 1987, when stocks sprinted out of the gate by more than 11%, continued rallying into the summer, then crashed, though did limp to a full-year positive return.
In the eight other years when January's first weeks added 4% or more, the full-year market gains ranged from 11.5% to 45%.
What's magic about that 4% three-week threshold? Not a thing, but history is history.
Comments? E-mail: michael.santoli@barrons.com
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