If you’re an Apple shareholder who was wondering after last week’s stellar earnings report why the value of your stock market was falling rather than rising, the reason given – that chip shortages will weigh on and short-term prospects – it may not seem good enough. For a trader who looks at every short-term opportunity to move money out of the portfolio where the next quick dollar is likely to be, there is no need for that “sell on the news” headline. Long-term investors, however, might want to consider a recent fact about the company and negative headlines: Apple has surpassed almost every short-term “sell-off” title in recent years in its quest to be a more than just company. $ 2 trillion.
Trump’s trade war with China? All right. Surprised decision to stop offering a guide for the iPhone drive? Lots of predictions about anything like the iPhone’s super-cycle coming though. As for the global lack of semiconductor chips now being cited by Apple, it might be wise to keep in mind that Apple has a long history of being fairly conservative with its prospects – the formal earnings guide isn’t even back. And one more thing: Tim Cook has been elevated to the position of CEO after Steve Jobs based on his mastery of global logistics.
“We’ll see that, if Apple has any trouble getting chips, then all the other companies on the planet will have 10 times those problems,” said Nick Colas, co-founder of DataTrek search. “If you’re really worried about the chip offering, you want to own Apple because it’s the first in line in every fab chip.”
But there’s a bigger question relevant for Apple and the rest of the market: How strong will the next stage of growth be for the market?
People visit the Apple store at the Oculus Mall in Manhattan on July 29, 2021 in New York. Several stores in the mall, including the Apple store, have asked guests to resume wearing masks while Covid’s Delta variant spreads across New York.
Spencer Platt | Getty Images News | Getty Images
The immediate market outlook doesn’t necessarily scream buying on the dip after the big selling technology on the new, according to Colas. Seasonality is an immediate risk, with the market history showing the early August period to be a volatile one for the VIX volatility index.
“It’s a valid trading question, where to go for the trading dollar in August,” Colas said.
Short-term trade versus longer-term investment
Since 1990, the beginning of the August period has been one in which the VIX culminates. Part of the reason is the lighter volumes on the market during the summer. “It’s a feed for liquidity, when people are on vacation … a lower number of trades and more volatility than any news will bring. I tell customers to be careful,” he said.
Wednesday to Friday last week, the The S&P 500 trading volume was less than the 30-day average.
For the short-term trader, a rotation away from big-cap to small-cap represented by Russell 2000, which Colas described as “way too sold” since its torrid hot strip in early 2021 , might make sense. “The little caps went on parabolic until March and April and haven’t worked since because they went so far,” he said.
That makes them, at least statistically, based on end-of-day returns of 100 days, economical now.
But for investors who aren’t playing the market for a quick exchange, Colas says disappointing post-earnings trades from Apple, Facebook and Microsoft shouldn’t weigh too much. Amazon has been the outlier in the lack of revenue expectations instead of posting at a high rate, making a news outlet a “fair” reaction, according to Colas.
Great technological actions were really posted in the Q2 reports
It’s also important to remember that big gains from the rest of the big tech were already embedded in most stocks that had a strong June and July based on the well-predicted market – that Q2 gains will be stellar. “The market was bidding names in the quarter. The market snorted in surprise and they all happened, and when you see stocks gather in a quarterly gain, it’s just hard to sustain that. It’s ‘selling on the news.’ unless there is a tremendous amount of good news and guidance, ”Colas said. “It’s normal behavior of capital markets.”
It goes back to an important data point in assessing the strength of these companies: they have doubled their earning power in the last two years. “That’s amazing,” he said. And that gives them more comfort in the long run. “I don’t see any change. Great technology is always the place to be.”
He cited two reasons.
Even if these companies have doubled their earnings growth, they don’t think they are close to the peak of earnings. “It’s just a much higher base to build on.”
After all, these companies have definite advantages in the industry and do not compete directly against each other in a zero-sum game in many areas of strength.
These companies have greatly increased their profits because the pandemic has changed consumer patterns, made us all even more focused on technology, and the market has made a lot of money betting on that game exactly as it did. But now the big question for big technology isn’t about its threatened dominance – even if many antitrust battles are emerging – it’s just about understanding how much more space they have to grow the rate of growth of earnings.
“Tell me what you would pay for a company with a return on investment of 30% and structural growth from 10% to 15%, and can you do that for a decade? What’s the multiple? It’s 30 times or 40 times. “No idea,” Colas said, “but I know it’s not 20 times.”
Apple was an example from this group of concerns about multiple pricing to earnings. He remained the rest of the tech giants for years, seen as a hardware vendor and weighed down by that market view until service activity increased through the pandemic and the market leader. $ 2 trillion was given to the company. And again this year, it was “the weirdest laggard,” in Colas ’words, that his annual return on earnings was about 10% versus about 30% for Facebook and Microsoft.
Apple also drove the S&P 500, ahead of earnings. One of the reasons: it has sucked so much demand in the future investors are rightly concerned that publishing good earnings comps will become harder. But, Colas said, that could also mean it takes up more space to collect, even in the short run when a new iPhone launches in the fall and the return to school increases spending on consumer technology.
The longer global growth history to which the entire stock market is tied is not a lock. In fact, amid the panic over inflation earlier this year and the expectation that the 10-year Treasury yield would go higher, it did the opposite. “The market fully understood growth had peaked in Q1 and began to trend at the end of the quarter,” Colas said.
The history of rates was wrong, but slower economic growth is now higher on the list of investors ’concerns for a U.S. market where P / E ratios are high. Great technology accounts for 23% of the S&P 500 and this means that whatever the market decides afterwards on its high valuations will weigh on American equities in general.
But investors don’t have so many great choices in the world. With the situation in China between the government and its main companies resulting in maximum losses in recent weeks, there may be marketing opportunities, but emerging markets are not a place to be just for a trade. And even if there is a potential gap in other international markets such as European financiers, it will take time for rates to move in a direction that benefits those actions.
“What’s up? It’s the SU and the top of the hood table,” Colas said. “That’s what you need to own. It always goes back to the same names.”
Looking at industry weights up to the 1970s and through the 1990s, he says there was never a time when five companies had more weights. “It’s only 5 names, and it’s not like when Exxon was at its peak at the S&P. It was a convenience game. These companies have huge barriers to entry and very high structural yields.”
Even with these advantages, seeking to understand what their earning power will be post-pandemic, or at least when the world transitions from the pandemic to persistent effects, is the biggest problem for big technology.
“What is a fair growth rate for 2022? It’s difficult,” Colas said.
For Alphabet – the only one among the big tech names to report last week that it has grown after its earnings – and for Facebook, which has repeated a previous warning of slowing revenue growth, there is the cyclical nature of the advertising market to trust, and that hasn’t changed all that in recent decades. Apple, however, is more difficult, because even as it has made progress going through the history of the iPhone and building its service business into a major growth engine, so much hardware demand has been advanced.
For Amazon, Colas noted that the share of e-commerce demand will increase from 17% to 24% in Q2 2020, and then back to 20%. And every percentage point in that band has a big influence on Amazon’s business model – in fact, he pointed to it as a reason why Amazon had been “stuck in that band” for nine months before reaping the gains. . From October 2020 to June of this year Amazon refunded around but did not receive the offer like the other names until pre-profit. From year to year after its earnings fall, the stock has barely made a profit, just under 3%.
What only happened in all of these stocks was a peak in earnings, but it’s not close to the peak earnings for these companies, Colas said. The concept of peak profit, which has been a problem for investors, implies that there is a point in the cycle when a company shows its highest earnings growth in absolute terms. “It’s about peak earnings, and no big tech company is close to peak earnings on an absolute basis,” Colas said. “Because they continue to grow and their amount of leverage is massive.”
It is more likely to be a purchase on the future after the news sale is gone.