The cure for overcapacity comes from one of two things: either demand catches up or the existing capacity becomes obsolete. Until then, very often, investors have to live without revenue growth.
Facebook, which just announced a blowout quarter, has proved that it can use its heft to further entice users and advertisers. But with it, and even Google after its recent earnings miss, it is tougher to recognize overcapacity, because these companies sell intangible products like ads and search. But you can look for signs of overcapacity by watching revenue, monthly average users and profit margins, which is why these metrics are so important to investors when attempting to put a value on these companies.
So what to do as an investor? Reconsider your holdings in light of the above cycle. There are other variables to consider when deciding whether to buy, sell or hold, but the almighty cycle of every sector and business remains fairly consistent. Overcapacity hit Apple this week, and that should be a wake-up call to every investor, invested across every sector.
—By Mitch Goldberg, president of ClientFirst Strategy
Read more of Mitch's market commentaries here.