I like stocks more when they come down than when they are flying high. There. That's a simple declarative statement that works well on a day like today.
I say that because whenever we get a selloff of some magnitude, and about 30% of the Nasdaq stocks being down more than 10% counts as that, it always seems there are more people running from the sale than to the sale.
Notice, I didn't say running from the fire versus to the fire. Because in the end this is about solid merchandise being marked down by multiple sellers for multiple reasons.
Let's go over them first so we have them in front of us.
First, there was no clear-cut reason for the selling on Friday. We had noted shortseller Andrew Left profiled this weekend in The New York Times, talking about how Nvidia's (NVDA) stock had come too far too fast and had become casino-like. I like the company very much. So does Andrew. When I debated him about it, I thought he made a lot of sense. The stock had gone from $102 to $168 in a little more than six weeks.
Still, I felt that Left's analysis was little more than a speeding ticket. He wasn't saying it had done anything wrong or made any mistakes. The stock had accumulated a lot of weaker hands, we all agreed on Halftime Report with Scotty Wapner today, and they had to be shaken out. The question is, does $145, down from $168, amount to enough of a correction to get started?
I think the answer is yes, but I also have to tell you that your first buy may not be your only buy and there could be more pain to come.
Second reason for the decline today? We got a thoughtful but I think mistaken downgrade of Apple (AAPL) from Buy to Hold from Mizuho, a brokerage firm that does fine work. It was thoughtful because I think the analyst, whom I debated on Halftime today, was trying to get ahead of an eventual letdown after the next edition of the iPhone comes out. Historically, there has been sell-the-news fall-off in Apple's stock and I don't like the hoopla that's building up on the stock ahead of the launch.
So why do I think it is ill-advised? First, the report talks about the valuation being too high. In reality, the stock is both cheap relative to most fast-growing tech and all the consumer products companies, which I think are an appropriate compare.
Second, the analyst questions growth in China and India. He's done a lot of work on both, but I think he's simply hitting a lull in buying in China and his rap about India -- that the phone is too expensive -- I think underestimates how much the people of India want the phone and that, when the infrastructure is built out, phone companies will compete against each other to offer it at reasonable prices.
The analyst questions the strength of the service revenue stream, something I believe will only accelerate as the ecosystem builds out, and he is critical of those who own it for repatriation of dollars because we don't know what will happen in Washington. The company does have $256 billion in cash with 90% of that overseas. If President Trump can see his way to cut taxes for one time only, that could be huge for the company. But Mizuho says it is worth only $10-$15 in value.
Finally, the analyst outright dismissed the new HomePod or anything else that's ancillary to the phone as unimportant. I fundamentally believe Apple's got a level of brand loyalty that you would be foolish to discount.
My total take? Apple's a visible stock in this environment and it carries a lot of weight. Friday and Monday's decline did freak people out and it's understandable but, again, if you think, as I do, that this is the strongest consumer products company in the world with incredible brand loyalty, then all that has happened is the stock has gotten cheaper.
Third, the FANGs -- Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Google or Alphabet (GOOGL) -- all rolled over with Nvidia and Apple. I believe Facebook and Alphabet are inexpensive if you go out until the end of 2018, even as they might seem expensive now. That valuation on the out years makes me confident that if you don't own one of these, you are getting a chance to buy some here and then some lower if we have another down day or two.
Amazon and Netflix are harder because they are difficult to value. All I can say is there's nothing wrong with either of these companies, but the stocks do take breathers and when they take them it's been rewarding to buy and I don't know why it would be different now. There are a host of other companies that fit this pattern including Salesforce.com (CRM) , Adobe ADBE and Autodesk (ADSK) , for example, and all of their stocks have gotten cheaper, too, which I like. At one point, all were down huge today and managed to rally. I can't tell you when their stocks will bottom. Perhaps they already did today. I can tell you that you don't often get a discount and while the discount may not be the first one -- there could be further markdowns -- it's an opportunity, not a red flag about something that must be avoided. (Apple, Facebook, Adobe and Alphabet/Google are part of TheStreet's Action Alerts PLUS portfolio.)
Finally, there's the matter of the rotation out of high growth into value like retail, banks and oils and some healthcare companies. While I think the change makes some sense, I just regard all of value as something that's just not intriguing to the big mutual funds that manage money.
Banks need the Fed to raise rates several times and when we hear from the Fed this week if it is dovish and commits to only one rate hike, that's the end of the rally. It's not in their hands. Retail seems knee-jerk. Yes, Nordstrom (JWN) is considering going private. But we have had a couple of days of rally and now what? We're not going to hear any great news from this group. Oils? They can't go anywhere until crude has a big run. I don't think you can get that. Healthcare? There has to be a catalyst, like a takeover. I can't find one.
In other words, unlike the tech companies I have highlighted, these companies don't control their own destiny. It's their inability to do so that makes their stocks so difficult to rotate into or even gravitate to if there's such a big sale going in on the high-growth businesses.
Ultimately, these kinds of selloffs, the profit-driven kind, are exacerbated not by analyst downgrades as Apple and Adobe were, or shortseller critiques like that of Nvidia, but outright shortfalls or massive sea changes in the market. That's good news for the bulls because there just aren't a lot of earnings coming until next week and there aren't a lot of data points, save the Fed, until then. All of that cuts for an orderly decline that gives you a chance to buy if you haven't yet, well below where stocks were Thursday. In other words, the sale's still on and that's not something to freak out about. It's something to embrace.