Too Much Love in These Stocks?

Question: Applied Materials (AMAT - commentary - Cramer's Take) just announced -- overvalued?

-- P.W.

Answer: Overvalued is an understatement. Try grossly overvalued. Set aside the bubble years when reviewing Applied Materials, and look at pre-bubble norms instead. On that score, Applied Materials had a much better year in 1996 than it will have in 2003 in terms of sales per share, earnings, cash flow, etc. The stock traded between $2.70 and $5.60 in 1996. It's now trading at about $19. Even assuming a robust pickup in demand and giving credit for its cash-rich balance sheet, I can't justify a value north of $10 per share.

My read of the new orders at Applied Materials, announced earlier this week, suggests that new CEO Michael Splinter was less than straight with investors. For example, in the second quarter, a $112 million order was booked. Subsequently, that order was canceled when a partner left an Applied Materials joint venture, and it was re-booked in the third quarter with a new partner in place.

However, if you back out this re-booking (which wasn't technically a brand-new order), then new orders actually shrunk to $938 million. But listen to the company press release: "New orders of $1.05 billion for the third quarter of 2003 increased 9% from $971 million for the second quarter of 2003." In the same release, CEO Splinter says, "We are pleased with our financial performance this quarter, particularly the increase in new orders as we focus the company on renewed growth."

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Question: Is NovaStar (NFI - commentary - Cramer's Take) overvalued?

-- T.Z.

Answer: I think it is. Forget traditional metrics here: NovaStar sells at 9 times earnings with a 16% dividend yield. That doesn't mean the company is cheap, though. NovaStar came out of nowhere to participate fully in the refinancing boom by emphasizing nonconforming loans, which are to borrowers who don't qualify for agency/conventional loans. I don't see how earnings are sustainable, and my guess is that the balance sheet will suffer from write-offs in the not-too-distant future.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.