Fear The Rotation
The truth is we don't fear anything. Still on this side of the dirt? Roof over the head? Still walking around on two feet? A can of beans on the shelf? The kids have shoes? All these items check out and you're still complaining? Remember, gang, whining is for the wicked, and wicked we are not. Let's get to work.
So, they're selling the tech space. Okay. Tech is still the equity market's leading sector over three months, and pretty much over any timeframe longer than that going back over multitudes of years. Tech has been kicked around before. We have asked these questions before. Tech changes. Every single "old school" type business is now dependent on technology. The sector takes a breather, and sometimes evolves. In my opinion, the space eventually finds its footing and regains leadership. I think it has to.
Let me ask you two more questions. Do you think the world will require more or less semiconductors going forward? Do you think the "cloud" will expand? Easy questions to answer. Does FANG stay FANG? Maybe not. Amazon (AMZN) , and Alphabet (GOOGL) have both made significant strides toward evolution. Both are now major cloud players, while still reaping the benefits of their core businesses. Facebook (FB) , and Netflix (NFLX) both face challenges that these two do not.
At Facebook, what is plain to see is that the firm is dealing with reduced revenue on reduced margins, while being run by a management team that is either too arrogant, or inexperienced to understand that not communicating these problems to the investment community ahead of earnings might be considered in the eternal words of the "Gunny" (RIP.. Always Faithful), or any red-faced Parris Island Drill Instructor, a major malfunction.
In the case of NFLX, there was no glaring misstep made by management. That firm is just up against rising expenses as well as increased competition in a maturing business. The costs associated with putting together its own entertainment line up are not going lower, but margins are. Now, to the streaming business -- here come the likes of Amazon (AMZN) , Walt Disney (DIS) , and even Walmart (WMT) . Oh my. By the way, personally, I am an early subscriber to ESPN plus. Big fan. I expect this to be a winner.
Wet The Beak?
Tonight, we'll hear from Apple (AAPL) . The savior of the tech sector? Or the final nail in the coffin? Tonight, the industry has prepped for a consensus view on EPS of $2.18 on projected revenue of about $52.35billion for the quarter. Whispers are running up around $2.25. Think $52 billion seems a little light? Think again. the firm's fiscal third quarter is regularly the weakest quarter in this firm's business cycle, and $52billion is actually a stronger Q3 than we have seen from these guys. If tonight's prints come in precisely upon consensus, you're looking at 15% y/y revenue growth that provides 30% earnings growth, both better than "the season" in the broadest sense.
What do we need to see tonight besides those headline numbers? That's easy. If you're long the name, you want to see iPhone unit sales print above the 41 million units sold in the year-ago quarter. Numbers perhaps as high as 42 million might be necessary. Average selling price is just as important as unit sales. The firm has to show success at getting their own customer base to pay more for what they already have. A number with a seven handle ($700 plus) gets this done in my opinion. Then, we need to see progress on servicing the Apple ecosystem. How much success is the firm having in migrating existing customers from the older iTunes downloaded music model to the monthly subscription model of Apple Music? How about the mobile gaming business?
After all that, you are going to hear an update on the huge scheduled returns to shareholders, as well as the impact upon the firm's businesses directly related to U.S./Chinese trade relations, and on the next generation of the iPhone. Do not be surprised if Tim Cook intentionally manages down expectations. I am flat this name right now. As we approach the mid-$180s, I will wet the beak.
Where To Run
Oh, you can run, but as they say... "You can't hide". A tech beat-down, or more specifically, uncertainty going into AAPL earnings, will have significant reach. It already has. If this scares the snot out of you, then maybe go watch cartoons all day, or buy some Goodyear Tire (GT) . That name ran 4% yesterday, despite lowering full year guidance in the name of higher input costs, currency pressures and worries over China. Not to mention that after the closing bell, news broke (according to Jalopnik) that the Department of Transportation had opened an investigation through the Office of the Inspector General into the firm over certain defective tires.
I can't tell you kids where to run, but I can tell you what I bought late yesterday in the midst of the angriest part of the Nasdaq selloff. I nibbled at some of my cloud names. If you follow me on Twitter or StockTwits, you already know this, because I gave it to you in real time. You see, I already have enough Amazon and Alphabet for what I accept as my tolerance for risk. Other software/cloud type names had gotten away from me before I could get my fill... and you know how us old fashioned traders are about paying up for shares, especially for a group that trades at a valuation premium.
So it was on a day where the Nasdaq Composite crossed below it's 50-day Simple Moving Average, Information Technology was the weakest sector in the S&P 500, and Software was that sector's weakest industry that I finally felt that I could add to these positions. Am I right? I will let you know down the road. I do know that buying (especially stocks that provide what others need) when Wall Street fears, and selling when Wall Street gets overly confident has worked for me for longer than those hi-frequency kids have been alive.
Best of all, these firms do not have exposure to China, do have exposure to the FANG names and Apple only in the broader sense of "pin action", or ETF association. In other words, once you get past that, and the profit-takers (can't blame them), the selling is in my opinion unjustified. If I'm wrong, I'll add more. That's why we do these things incrementally.
Tech Buys
Adobe (ADBE) : Last $242.32. Trades at 31x forward looking earnings. Levered Free Cash Flow is spectacular. EBITDA and Operating Margins continue to grow. Balance sheet looks good. Both Current and Quick Ratios are either at or above 2. For those who've never taken an accounting class, that's freakin' solid.
Target Price: $285, Panic Point $211.
Salesforce (CRM) : Last $138.03. Trades at 51x forward-looking earnings. Levered Free Cash Flow, like ADBE, is robust. Debt is manageable. Margins are rising here too. Current and Quick Ratios are both above 1, which indicates an ability to meet all short to medium term obligations. Oh, and these guys have Marc Benioff. How much is a competent CEO trusted by investors really worth? Ask Advanced Micro Devices (AMD) , or maybe ask Intel (INTC) .
Target Price: $160 (up from $152), Panic Point $132
Splunk (SPLK) : Last $95.38. Trades at 62x forward-looking earnings. Do I love this name as much as the other two? Of course not. Cash Flow is not nearly as impressive. Margins are improving, yet still negative. The name has suffered several downgrades. What do I like about them besides the fact that the stock started selling off before it was cool? No debt. None. Nada. This forces the Current and Quick Ratios up to very firm levels. These guys can hang on for a while, and do not forget, they raised quarterly and full year guidance back in May. This may simply be the trough.
Target Price: $125, Panic Point $87
Economics (All Times Eastern)
08:30 - Employment Cost Index (Q2): Expecting 0.7% q/q, Last 0.8% q/q.
08:30 - Personal Income (June): Expecting 0.4% m/m, Last 0.4% m/m.
08:30 - Consumer Spending (June): Expecting 0.4% m/m, Last 0.2% m/m.
08:30 - PCE Price Index (June): Expecting 2.3% y/y, Last 2.3% y/y.
08:30 - Core PCE Price Index (June): Expecting 2.0% y/y, Last 2.0% y/y.
08:55 - Redbook (Weekly): Last 3.8% y/y.
09:00 - Case-Shiller HPI (May): Expecting 6.5% y/y, Last 6.6% y/y.
09:45 - Chicago PMI (July): Expecting 62.0, Last 64.1.
10:00 - Consumer Confidence (July): Expecting 126.5, Last 126.5.
16:30 - API Oil Inventories (Weekly): Last -3.16M.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (AMT) (1.64), (ARCH) (2.16), (ADM) (0.77), (ARNC) (0.29), (BP) (0.14), (CMI) (3.66), (HRS) (1.76), (JCI) (0.79), (LL) (0.23), (OSK) (2.03), (PFE) (0.74), (PG) (0.90), (RL) (1.36), (SHOP) (-0.02), (VMC) (1.35)
After the Close: (APC) (0.58), (AAPL) (2.18), (BIDU) (2.59), (H) (0.49), (IQ) (-0.37), (SMG) (2.59)
