The Lato Letter – June 15, 2017 Volume 6, Issue 2

The Lato Letter – June 15, 2017 Volume 6, Issue 2

There is no question that US technology stocks have been the market leaders over the last 12 months.
Two of those technology stocks, Alphabet and Apple, have certainly been big contributors to the returns
of Padlock’s portfolios and two others, Facebook and Microsoft, have been on the Padlock watch list for
a few months. The one year charts of those four stocks clearly show their strength in the past year until
the declines that started last Friday.

Alphabet (GOOGL-NASDAQ, $967.93)

Apple (AAPL-NASDAQ, $145.15)

Facebook (FB-NASDAQ, $150.25)

Microsoft (MSFT-NASDAQ, $70.26)

Charts courtesy of PC Quote and E-Signal

The question is though whether or not these stocks are partying like it was 1999 and we all know what
happened in 2000. Four “blue chip” technology companies that were among the market leaders in 1999
were Cisco, Intel, Microsoft and Texas Instruments. Their 20 year charts show a few years of very strong
performance that ended in early 2000 followed by years and years of declining prices. In fact, although
each of these companies has continued to be integral parts of our tech industry, only Microsoft has
surpassed the all-time highs that were established over 17 years ago.

Cisco (CSCO-NASDAQ, $31.60)

Intel (INTC-NASDAQ, $35.53)

Microsoft (MFST-NASDAQ, $70.26)

Texas Instruments (TXN-NYSE, $80.17)

Over the years, investors who have uttered the words “it’s different this time” have generally lived to
regret saying it. I will hazard to say that it is different this time and the difference is the Price/Earnings
(P/E) multiples that the two groups of stocks were and are trading at. Listed below are the trailing P/E
multiples of the former leaders using the average price in the first quarter of 2000:

Cisco                 170.3X
Intel                  46.0X
Microsoft         58.1X
Texas Instr.     72.5X
Average P/E    86.7X

Now, listed below are the current trailing P/E multiples of the current leaders:

Alphabet      31.6X
Apple            16.8X
Facebook     39.1X
Microsoft    30.7X
Average       29.6X

P/E multiples courtesy of Wikinvest

Not only are the average multiples almost three times higher but the multiples were accorded to those
stocks in a markedly different interest rate environment. The 10 year US bond was yielding 6.66% on
January 1, 2000 compared to its current level of 2.15%. Today’s interest rates should allow for higher
P/E multiples but as shown, that is clearly not the case.

There are other great technology companies today, such as Amazon, Netflix and Tesla, that are trading
at P/E multiples reminiscent to 2000. These are all great companies and I have no doubt that they will
continue to be technological leaders for years to come but their valuations simply preclude them from
being included the Growth At a Reasonable Price (GARP) methodology used to build the Padlock

Getting back to the previously mentioned current leaders, they all fundamentally remain very strong
and attractive. From a technical analysis perspective (and the technicals appear to be in charge for the
short term), the stocks are approaching and in the case of Apple fallen below their 50-day Moving
Average (blue line on the chart). It is entirely possible that the 200-day Moving Average will be tested
but that could create a great entry point for all of these stocks for investors who don’t currently hold

Alphabet and Apple remain the two largest equity holdings in most Padlock portfolios and over the long
term, I continue to expect that they will be significant contributors to the portfolios returns. If you have
any questions or comments on these thoughts, I would love to hear from you.


This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed
and is subject to change without notice.

Padlock Investments is ready to take on your investment portfolio. Ask us how!