Stock Market Savvy: 5 Investing Lessons from 2012's First Quarter

S&P 500
S&P 500

After a monstrously good first quarter -- during which the S&P 500 climbed 12%, only to be outdone by Nasdaq's 19% spurt -- what did we learn?

Every bullish run or bearish retreat offers a great opportunity to learn something about the market and the publicly traded companies that make it happen.

Let's go over a few of the morsels that Mr. Market has served up for those paying attention.

1. You can be big and still be nimble. Apple (AAPL) became just the sixth company in this country to cross the $500 billion mark in market capitalization earlier this year, and some investors began to worry. Every other company that hit that mark went on to peak shortly thereafter, and they are all worth less than $500 billion today.

Why should Apple be any different? Well, for starters, it's still surprisingly cheap on an earnings basis. The iPhone, iPad, and Mac daddy is trading for just 14 times this year's projected profitability. Many of the companies that were temporarily marked up to $500 billion were fetching unsustainable multiples during the dot-com bubble.

Apple is also still growing quickly despite its gargantuan size. The $46.3 billion in net revenue that the tech star rang up in its latest quarter was 73% ahead of what it served up during the prior year's holiday quarter.

2. Even dead stocks can come to life. Sears Holdings (SHLD) has been one of the year's biggest surprises. The parent company of Sears and Kmart is one of the few companies that has seen its stock double during the first three months of the year.

Are Sears and Kmart suddenly bustling with customers? No. The chains continue to post negative comps. Trendier, cheaper, and some would argue cleaner discount department stores continue to eat at each concept's traffic.

However, after Sears Holdings was left for dead late last year after announcing store closures, savvy investors began to see the value of the company's rich real estate assets and smaller concepts.

3. Dodgy accounting never really goes away. The first quarter ended with a bang -- and not a good kind of bang -- for Groupon (GRPN).

Sponsored Links

Shortly after the close of the final trading day in March, the daily-deals leader revealed that it will have to restate its fourth-quarter results. A "material weakness" in its internal accounting system caused it to overstate $14.3 million in revenue and $30 million in operating profit.

In a nutshell, Groupon is taking a hit from more order cancellations than it was expecting, leading the fast-growing company into flawed revenue recognition assumptions.

Should investors be surprised in light of the sharp drop in the shares after the restatement announcement? Not really. Groupon's IPO was delayed last year because regulators didn't approve some of the creative accounting metrics presented by the otherwise profitless company in its prospectus.

4. When the market's healthy, the IPO pipeline fills up. In an updated filing, Facebook appears headed to a May IPO -- apparently on the Nasdaq, according to reports Friday.

Investors hungry for new companies don't have to wait until next month, though. Several notable companies went public this past quarter, taking advantage of the market's general bullishness to pull off their exchange-traded debuts, among them organic food specialist Annie's (BNNY), casino operator Caesars Entertainment (CZR), and restaurant reviews website Yelp (YELP).

Most of the companies that went public during the quarter are trading higher, and that will likely encourage even more companies to hire lead underwriters. Strong performances also encourage investors to buy into the otherwise speculative new issues.

The spike in supply is satisfied by the spike in demand.

5. A market correction doesn't happen just because everybody's expecting one. The first quarter was spectacular, but it came after a meaty fourth quarter that was nearly as impressive.

After the S&P 500 raced to an 11% gain during the final quarter of 2011, many analysts were calling for the market to take a breather. Whenever the market takes a big step forward, the knee-jerk reaction is to predict that it will take a small step back.

Corrections do happen, obviously, but rarely will you see one take place when the consensus is that it will happen. If nervous investors have moved to the sidelines in anticipation of a correction, that means they have already sold and are more likely to be buyers in the future.

In the end, 2012 delivered the market's strongest first quarter since 1998.

For a free report on the the top stock for all of 2012, straight from The Motley Fool's Chief Investment Officer, click here.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.

Get info on stocks mentioned in this article: