We had almost forgotten that markets sometimes hit air pockets. On Friday we were reminded, big time. A drop of around 2% meant that the leading indices closed the week on sharp declines, of 1.7-3.5%, which will probably give us a negative January at the close of trading on Thursday.
Every correction has its explanation, and this time the analysts are laying the blame on emerging markets that are wobbling, with a severe crisis in some currencies. Indeed, since the beginning of the year, ETFs on China, Brazil, South Korea, Turkey and Chile have plunged by about 10%, and the Argentinian currency collapsed by 15% towards the end of the week.
Among this week's important macro events, the last Fed meeting for outgoing chairman Ben Bernanke on Tuesday and Wednesday stands out, with Janet Yellen taking over the reins on Friday. Time will tell whether the markets are preparing a tough crisis to welcome Yellen and her deputy, Stanley Fischer, as happened to Alan Greenspan, who was appointed in August 1987, and won his spurs with the way he dealt with the great crash that took us by surprise two months later.
The results season is well underway. About a fifth of the companies on the S&P 500 list have now reported. Of those, two-thirds have beaten the estimates, and about a quarter have missed, which is more or less what we have seen each quarter since the emergence from the crisis. This evening comes the turn of Apple (AAPL), which on Friday will celebrate the 30th anniversary of the launch of the first Mac, and even Steve Jobs never dreamt that, 30 years on, Apple would be reporting average daily sales of $650 million in the December quarter.
Among the Israeli companies whose stocks I hold here, Radware Ltd. (Nasdaq: RDWR) is due to report tomorrow before the opening, on Wednesday it will be the turn of AudioCodes Ltd. (Nasdaq: AUDC; TASE: AUDC) before the opening and of Mellanox after the close, and on Thursday, Ceva Inc. (Nasdaq:CEVA); LSE:CVA), DSP Group Inc. (Nasdaq: DSPG), and Attunity Inc. (Bulletin Board: ATTUF) will report before the opening.
To my mind, the results of Mellanox will be the most interesting, because the messages that investors have been getting from analysts have been poles apart. After a new "Buy" recommendation from a small investment bank early in the month, Barclays dealt the stock a blow on Friday with a downgrade from "Neutral" to "Sell" and a target price a long way below market of $36, wiping out the gains since the beginning of the year.
When an analysts musters the courage to issue a "Sell" recommendation on the eve of the financials, he broadcasts high confidence in his negative stance. After all, it's always safer to stay on the fence with a "Neutral". This is particularly so in relation to Mellanox, which, alongside one warning and guidance that has disappointed a couple of times, has twice managed to spring tremendous surprises, unforeseen by any analyst, boosting the share price by tens of percentage points on results day.
Barclays back flip is astonishing, because only a year ago, in December 2012, they insisted that Mellanox was a "Strong Buy", with a target price of $140. Has the past year seen such a dramatic deterioration in the company or in its target market that Barclays now sees the stock as worth just $36? In the downgrade note I didn't find explanations that would persuade me to sell Mellanox at a profit of 350% over five years and bolt with the money.
Bank of America made a similar move in relation to SanDisk Corporation (Nasdaq:SNDK). In this case too, the bank downgraded its recommendation to "Sell" just before the financials, a week ago. On Wednesday, after the strong results and reasonable guidance for the year ahead, such as few companies are able to provide, one asks oneself: what on earth was the downgrade all about, and on the eve of the results at that?
As far as I am concerned, in Mellanox, and in SanDisk too, I find the three ingredients that make a stock worth investing in for the long term, ignoring analysts' noises: strong management; technological leadership; and a clear market need.
On the last factor, someone tweeted last week that there are two billion smartphones in the world, each taking 20 pictures a month on average, meaning half a trillion pictures a year. That makes me think of the storage needs for these pictures, which provide an excellent living for SanDisk.
Just as the pictures require storage, the data of all kinds with which we are inundated, the sites, and the devices, all need to be moved fast, and that's where Mellanox enters the picture, with its leading technology. I have no doubt that 2014 will see an acceleration of investment in this area, and I don't recommend investors to gamble on the timing of the acceleration. Better to wait patiently, because the breakthrough will come, sooner or later.
Published by Globes [online], Israel business news - www.globes-online.com - on January 27, 2014
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