RealMoney Silver - Where September's Stocks Are Headed Next

Where September's Stocks Are Headed Next
By Bill Trent
RealMoney.com Contributor
12/19/2007 2:41 PM EST

I wrote six columns in September that included a bullish or bearish stock opinion on:

Motorola (MOT)
Yahoo! (YHOO)
Office Depot (ODP)
Delta Airlines (DAL)
Apple (AAPL)
Adobe (ADBE)

With three months behind those calls, I thought it was a good time to see how they performed and whether any changes in my opinion were warranted. On the whole, the picks are playing out more or less as I expected.

Motorola

On Sept. 10, I wrote that if Motorola could get its free cash flow back up to 2004 levels and grow the cash flow a measly 2% per year from there, MOT shares would be worth nearly $23.

Instead, the cash flow position has continued to deteriorate, contributing to former CEO Ed Zander's recent ouster. The stock is down 7.2% since the article was written, compared to just a 0.5% decline in the S&P 500.

Still, I think the issues at Motorola can be fixed by bringing the costs -- particularly research, development and overhead -- in line with the current revenue generation. Alternatively, activist shareholder Carl Icahn could push to break the company up into smaller pieces that might be acquired for a higher total than the current company is currently able to garner.

Either way, I'm sticking to my guns on Motorola.

Yahoo!

On Sept. 11, I made a bearish call on Yahoo!, saying I didn't believe in the consensus growth estimates and that Yahoo! wasn't generating enough cash flow to make waiting for the recovery worthwhile -- at least not for me.

Things haven't gotten any better since then, and the stock has lost 1.1% -- although that is a slightly better performance than the 1.7% loss in the S&P 500 over the same period.

I remain bearish on Yahoo!.

Office Depot

On Sept. 12, I made a bearish call on Office Depot (ODP) , saying "things are likely to get worse before they get better."

Things got worse, and after the company missed earnings and delayed filing its required 10Q, the stock has lost 23.3%, compared to a 1.7% decline in the S&P 500.

But I also said, "It looks like a stock that will pay off in the end," and I think the current downturn may have taken the worst out of the stock. I have written put options against the shares (a bet that has lost money), and I now think there are more reasons to be positive than negative.

Think the worst of the housing downturn is over? Office Depot's solid cash flow should make it a safer play than homebuilders or financials. Think small-business tech spending will rise? Office Depot's price-to-earnings ratio is a fraction of Dell's (DELL) .

Office Depot could still have some downside, and I don't expect a quick recovery. But at current valuations I can no longer justify a bearish position, so I'm closing out that call.

Delta Airlines

On Sept. 17, I made another bearish call, this time against Delta Airlines. Although the stock looked cheap, after I made some adjustments for earnings quality it looked more like a company recently emerged from bankruptcy (which it is). The stock has lost 17.7% since that call, compared to a 2.1% decline in the S&P.

Short term, anything can happen because airlines have tons of leverage that can lead to wild swings in profitability. But long term, I don't believe the major airlines have any better prospects than they did before the previous 10 or so bankruptcies, and I remain bearish.

Apple

I weighed in favor of the bulls for Apple on Sept. 17, and was rewarded with a 32.5% increase in the shares, compared to the 2.1% loss for the S&P 500. The share gains cut Apple's 3.9% free cash flow yield down to 2.9%, so it isn't the value it was then.

Still, the cash flow rose 250% from the prior year, and Apple's market share remains small for most of its product lines. The company continues to make desirable products, and if I had to take a chance on a tech name surviving an economic downturn, it might as well be Apple. Adobe

My last September stock pick was a bullish call on Adobe on the 18th. The stock always seems to sell off after a major product introduction such as the Creative Suite launch in May of this year. Investors tend to sell on news after buying up the shares in anticipation of it.

Although the selloff wasn't very pronounced this year, the shares did get stuck in neutral. My own call may have been a bit early; the shares are down 6.3% since the column published and the S&P is down only 4.9%.

On its earnings call, Adobe reiterated its guidance for next year. As the next product cycle moves closer, I believe my bullishness will pay off.