Sell Corning (GLW)
Here’s the dilemma that Corning (GLW) presents to investors right now. It’s one that we’ll face a lot in 2010 with all kinds of stocks.
The Wall Street consensus says that Corning will announce earnings of 42 cents a share when it reports fourth quarter 2009 earnings on January 25.
That would be a huge 223% increase in earnings from the 13 cents a share that the company reported in the fourth quarter of 2008.
So why not hold onto the stock? No need to sell just because the shares have hit my $19 price target, right? At $19, Corning sells for just 14.3 times projected 2009 earnings. That’s without a doubt cheap for a stock growing earnings at 223%.
The problem is that it doesn’t look like Corning is going to grow earnings by 223% in 2010. Or by 123%. But more like 23%. And just about all of that growth will be stacked into the first half of 2010. In the second half of 2010 Deutsche Bank projects that Corning will grow earnings by just one penny from the second half of 2009. That works out to 1.2% growth.
(I think that as investors get further into 2010 they will see a lot of stocks with this kind of earnings growth pattern: Big growth in the first half of the year on easy year to year comparisons and meager growth in the second half on tougher comparisons with post-economic-bust quarters.)
The Wall Street consensus is that Corning will grow earnings by just 6.7% a year for the next five years. That includes the 163% projected earnings growth in the first half of 2010.
If Corning were set to grow at 23% in 2010 and if that were the long-term growth rate, then Corning would be cheap at 14.3 times projected 2009 earnings. The PE to earnings growth ratio (PEG ratio) would be just 0.62. That’s way under the PEG ratio of 1 that classically defines growth at a reasonable price.
But if Corning’s long term growth rate is just 6.7%, then this is a very over-priced stock with a PEG ratio of 2.1.
At today’s price of $19.71, I think the stock trades with too much risk for the likely return over the next year. So I’m selling these shares out of my Jubak’s Picks portfolio today with a 25% gain since I added them to that portfolio on October 12, 2009.
If you are an aggressive trader, you can hold on until closer to the January 25 reporting date on the hope that the stock’s momentum will carry it higher and that a large number of traders will hang on in the hope that the company will beat expectations. (Or in the belief that you’re so much smarter than most investors who aren’t aware of the possibility that Corning’s growth is front-end loaded in 2010.)
If you are a long-term investor who follows my Jubak Picks 50 portfolio, I suggest you hold onto to Corning. The company has significant new businesses that make the 6.7% growth rate that Wall Street projects way too low over the long term. (Although in the near term, I think that rate is reasonably accurate since the new businesses will take time to grow to the size of the company’s existing fiber optic and flat screen glass businesses. Even a long-term investor, of course, could sell and then buy back during what looks like a disappointing second half of 2010.)
Full disclosure: I will be selling my personal position in Corning three days after this is posted.
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Done! Thanks Jim for another wonderful pick.
If there is anyway we can show our appreciation (tip jar, subscription…), please let us know.
This has been a great pick Jim, thanks! What about just gaining downside protection with a Stop Limit order, while hopefully enjoying some additional upward movement?
Nathan please
The man enjoys helping us out. Lets not get greedy. Appreciate the help and getting the book however.
> The Wall Street consensus is that Corning will grow earnings by just 6.7% a year for the next five years.
Despite all my efforts I could not figure out the source of this 6.7% figure. Most numbers are around 10% to 11%. Any help?
> Corning would be cheap at 14.3 times projected 2009 earnings
Why use 2009 earnings? Shouldn’t we use 2010 earnings which are %25 higher? This would put the forward PE at 11.5. With a growth rate of 11%, we would be very close to PEG=1, which is not too shabby. Am I missing something here?
I am not trying to make a statement. Just curious.
Nathan, I think that such a proposal may be restricted by the conditions of his employment. Observe how he always sells his stocks three days after making a sell call. But we could always ask him for the name of his favorite charity and make a donation.
Thanks again Jim for giving the small investor the benefit of your years of experience and access to information we would not otherwise have and your cogent interpretations of the data. It gives us at least a chance of avoiding the Wall Street epithet of being “the dumb money”.
N.B. Sometimes Jim’s estimates of returns are conservative due to the nature of his buy and sell calls. Following his advice alone but waiting for a dip in price, I was able to buy Corning for $14.60 and sell today for an approximate 34% gain as opposed to the 25% he reported in his blog. Thanks again Jim.
I bought GLW a bit after Jim recommended it, then got out at 18.50 and took my 18% profit, happy with that. No need to be greedy. Meanwhile, I took Jim’s advice and bought COH with my GLW profits. We’ll see how that goes. Jim targets it at $42 or so, but I think I’ll bow out at $41 or something less if it hasn’t moved much by May. Thanks again Jim. I’m having fun investing with this page.
With all the very good web sites that post this information they are all different. Now I don’t know if you can say but which web site is most accurate? Now for teva I came up with 17.22 p/e and a peg of .50. That assumes teva meets expectations of .93 on 2/9/09
@edelay: Actually, I am not greedy. on the contrary, I want to return the favor.
@andante: Jim runs this blog independently. As far as I know, the 3 day buy/sell is a self imposed restriction.
Fellow investors, IMHO Jim is telling us way more than selling/holding GLW. Sometimes, Jim, using is ‘zoom’ effect and his natural educational way of writing, is letting us ‘see’ the classical forest while concentrating on the tree. We should read this posting as one more step versus a strategy that he is developing right now. To All happy investing year!
@mopama: I really wonder what that strategy will be because about the great majority of the Jubak Picks are targeted for this Summer and Fall: Dec-10, Nov-10, Oct-10, Nov-10, Oct-10, May-10, Oct-10, Jun-10, Jul-10, Jul-10, Jul-10, Jun-10, Sep-10, Mar-10, Jun-10, Sep-10, Mar-10, Jun-10, Jul-10, Jun-10, Jul-10, Nov-10, Jul-10
Oh well, who am I to know?…
Up 26.46% and out. Thanks, Jim!