How long can you keep good stocks down? How long can they stay in the doghouse before a breakout? I think we are seeing the answer today, and the answer is, not as long as the bears think.
Today's the day when many a stock that has been languishing or puttering or just plain going down awoke from the slumber and regained their gusto.
Let's start with Apple (AAPL), the world's largest company. After reporting a terrific quarter in October, one where the company pretty much delivered on every single metric, the company's stock started percolating like the old days, rallying from the low teens to $122. But when it got there, Credit Suisse came out with a forecast reduction based on weak supply-chain orders discovered by "our teams in Asia." At the time, I said here we go again, a research firm has used its contacts to discern weakness in product sales by measuring components, something that's been done dozens of times since this stock's historic run from the March lows in 2009, when it hit $17.
For every new product, every product interaction, every cellphone change and freshening, I have heard about supply-chain weakness from "Asian teams." This note was particularly destructive because it came from a bull, with an aptly titled "Supply Chain Cuts, Weakness, Then Opportunity." Hmm, ominous decline, followed by redemption? I cautioned that this was a quintessential hedge fund number slash, meaning you may not be able to get out and then get back in. However, two days ago, UBS came out with some research that said the supply-chain overhang would put a damper on valuation and cut the stock's target price from $150 to $140 and said the order pullback was, and I quote, "not encouraging." To me, the piece seemed like a pile-on off the Credit Suisse forecast trim, but it worked and the stock slipped again.
But this morning we get a piece of research from Goldman Sachs, a "buy to a conviction buy" list, titled "The Shift to Apple as a Service." The piece is a totally refreshing, intellectual way to look at Apple as a company that is going from a hardware stock, a simple, maturing cellphone company, to one with a fabulous installed base that will have recurring revenues, including the upcoming TV service and a host of other attaching services like the Apple Watch. The piece makes so much sense. Why should Apple forever be pegged as just a cellphone story when it has so much going for it?
Plus, by the way, we have reports out of another supplier to Apple from China that the phone business is quite strong, totally disputing the "Asian team" channel checks. This whole thing reminds me of when CEO Tim Cook told me last summer that China sales were strong when every "channel" check said things were bad. Oh, and just so you know, every "channel check" that I do, which is pretty extensive, doesn't indicate any weakness at all.
None of this would matter if Apple's stock were expensive. But the darned thing trades as if it is some metal-bending prosaic auto parts company, selling at a substantial discount to the average stock in the S&P 500. The Goldman Sachs analyst is simply saying that when people realize there is more to the story than just a cellphone business, investors will pay up to $163 for this $116 stock. And, just to be sure, if it gets there, it is still a discount to the average stock, despite the balance sheet, brains and its behemoth status.
Or how about Allergan (AGN)? Here's a company that reported an amazing quarter, is offloading its non-proprietary, commodity generic drug business at a ridiculously high valuation to Teva (TEVA) and will have no debt despite being a serial acquirer of companies. The big rap against these so called roll-ups is that the people at the top skimp, cut costs, stop doing extensive research and development and run them for cash to try to pay down all of that debt. But CEO Brent Saunders is doing the opposite. Ever since Actavis, the former name of the company, saved Allergan from the clutches of Valeant (VRX), which is a serial acquirer in the worst way, he's bolstered the lineup, spent intelligently and deeply on research and development and is now going to sell an asset that will eliminate the debt.
It's a fantastic story, but the stock has been under siege because it keeps getting lumped in with the very company that is working diligently to crush it, Valeant. They both have big eye-care and dermatology franchises, and Allergan is using the weakness and what many consider the disarray at Valeant to take away valuable customers. Plus, there's been huge chatter that Pfizer (PFE) might make a bid for the company as early as next week, in part to get Saunders to run the combined company and in part because Allergan has one of those favored tax statuses that allows it to keep much more profit on the books. Meanwhile, if that doesn't work out, there's nothing keeping Saunders from buying a Biogen (BIIB) or an Amgen (AMGN), both selling at very low price to earnings multiples given their growth.
Yet this stock, because of its bizarre guilt by association with Valeant and because of a tweet from Hillary Clinton against higher drug prices, has been a pariah. I think that pariah status is going away. Oh, can I add that Biogen and the other four horsemen of the big pharma apocalypse -- Celgene (CELG), Gilead (GILD) and Regeneron (REGN) -- now seem like they, too, have some pep in their step? Has that pall been at last cast off? These stocks, with the exception of Biogen, have started to make their move. Perhaps it's for real. I can tell you this, with a Fed rate hike a possibility, that's actually a green light for these stocks, which will not be impacted at all by a quarter-point bump up.
Or how about Costco (COST)? Here's the best merchant in America, a magnificent company, that reported same-store sales before all others and they looked light, causing the stock to sell off. But after a solid week with retail sales reports, it looks like what was weak in isolation is pretty darned strong. No wonder Costco hit its 52-week high today.
Finally, there's a bid in the restaurant stocks other than McDonald's (MCD). Last night, Jack-in-the-Box (JACK), one of my favorites and a stock my charitable trust owns, reported good numbers but then gave a rosy outlook. We are so used to restaurant stocks guiding down that Jack, which includes the Mexican chain Qdoba, was a total breath of fresh air. Maybe the consumer really is going out. Maybe there's hope for a beaten-down group like this after all.
I know there's budding frustration in so many areas of this market. I know that it gets tiresome to be led around by the nose by FANG, the four Musketeers of Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL), now Alphabet, which are rallying again. (Apple, Allergan, Biogen, Costco, Jack-in-the-Box, Facebook and Google are part of TheStreet's Action Alerts PLUS portfolio. Amazon is part of TheStreet's Growth Seeker portfolio.)
Suffice it to say, though, that perhaps the market's lovey-dovey stock list, the ones that are anointed by big managers, is expanding back to companies that have delivered great results but have somehow taken a third-row backseat to FANG. Let's see how the day goes on, but it sure does seem like this market's going back to embracing best-of-breed and not just if it has the Internet somehow attached to it.