One of Wall Street’s oldest adages played out in full fashion yesterday, when Apple (AAPL) rallied more than 4% leading up to its highly-anticipated Sept. 9 event only to pull back when the news hit the market. And so, “buy the rumor, sell the news” comes true once again.
The tech sector in general has been having a tough go of it lately, and I actually think the industry is oversold at this point. Over the course of just a handful of days, during the severe market volatility we experienced at the end of August, the Technology Select Sector SPDR ETF (XLK) declined to a level not seen since Oct. 2013.
The ETF fell as low as $31.32 on Aug. 24 before turning around and rebounding more than 20% to close the following day at $37.65, its lowest closing price since Oct. 17, 2014.
A lot of big tech names took a hit on Aug. 24: Facebook (FB) fell 16% at its lowest point of the day, with AAPL, Yahoo (YHOO) and GoPro (GPRO) following closely behind. Other big-name tech pullbacks to note include Google (GOOGL) and Microsoft (MSFT), both of which fell as much as 8%. All of these companies have weightings in XLK.
The good news is that the tech sector has bounced back from its worst levels. The bad news is there are now a lot of resistance levels on the upside that will prove to be difficult hurdles. The result is a tight trading range waiting for a cue and catalysts.
So while I think the pain is overdone and probably finished for the moment, we cannot rule out continued volatility, which can be confused for pain, even when it’s range-bound.
This was the tightest trading range market in history until three weeks ago, so the gyrations were long in the making. Looking at the market from the technical view point and for the all-clear sign using charts, I suspect a close above $24.50 for the Financial Select SPDR Fund (XLF) will bring in a lot of sideline money. Through $25.50, we’ll start to see the momentum from cash and even long-term buy-and-hold investors. On the downside, the key is to hold above $22 and $22.50.
Get Ready to Buy Tech Stocks
All of this takes me back to another axiom, the No. 1 axiom in investing: Buy low and sell high.
Current market conditions mean you should be ready to buy. Here’s what you should look for to make things easier: leadership, execution, market share gains, and strong chart formations.
When you’re looking for leadership, you’re searching for the big names that have led the parade for years. Apple is one of them, and I think the reaction to yesterday’s event will tell us a lot about what to expect from the tech sector in general.
In short, it’s time to buy tech again.
Tech Stocks: AAPL’s New Look
Apple CEO Tim Cook unveiled the company’s newest products at Wednesday’s big event, including major changes to the iPad line — a new and larger iPad Pro will be launched in November — a revolutionary take on Apple TV, upgrades to the Apple Watch, and upgraded versions of the iPhone 6 and 6 Plus.
So here are my two personal takeaways from the event:
1) Apple is trying to break into corporate America. In the past month alone, the company has signed two major deals (although they didn’t get much press) with Cisco Systems (CSCO) and IBM (IBM), both of whom want a piece of the new Apple operating systems.
2) Apple has proved once again that they have serious pricing power, and they’re not apologetic about it. Just take a look at the prices of the company’s new products:
- iPad Pro 32GB: $799
- iPad Pro 128GB: $949
- Apple TV 32GB: $149
- Apple TV 64 GB: $199
The last version of the Apple TV cost just $99, so this is a giant leap in confidence for a product that seems to have tremendous demand.
According to an Adobe Digital Insights report, as much as 60% of all television viewing is done on Apple devices, which is frustrating for the company because it only gets paid once for the device while others get recurring revenue. This is why the company will go after Netflix (NFLX) as well as the gaming industry, and try to lever their hardware dominance.
Pricing Power and Market Share
I always tell investors that if you can find a company with pricing power that can sell its products for a lot more than any of its rivals, that’s a screaming buy. And I think others on the Street believe that’s the case as well, as AAPL rebounded on Thursday.
As far as I’m concerned, AAPL remains a strong player to be reckoned with in the tech space as the company will only continue to grow its market share. I’m also looking for leadership from Facebook, Google and Amazon (AMZN).
I mentioned execution earlier, and the goal here is for companies to meet the hype. That’s not always easy. In the past month, I’ve witnessed the complete dismantling of share prices despite amazing execution, but in the end, this is critical when modeling for true value.
The three things to look for in order to judge execution are:
- Beating consensus on the top and bottom line
- Taking market share
- Strong guidance
The best example of this is Palo Alto Networks (PANW), one of my favorite companies that made us 25% in two months the first time we owned it in Smart Investing. We’re back in it now and already up 10% in two weeks after the company posted financial results last night that crushed.
Revenue grew 59% to $283.9 million. Earnings soared more than 150% to $0.28 a share from $0.11 the year before. And then there was strong guidance and market share gains expressed by a telling line in the press release. According to Mark McLaughlin, president and chief executive officer of Palo Alto Networks:
“We are very pleased with our results for both the fourth quarter and fiscal year 2015. During the year we grew our customer base to over 26,000 customers, expanded our technology partnerships and distribution relationships, enhanced our next-generation security platform with new offerings and achieved $928.1 million in revenue, an increase of 55 percent year-over-year. We are significantly outgrowing the market and rapidly taking share.” [emphasis added]
That’s the kind of stock you want to look for, to become a part owner of a great company and build your wealth over time.
Curious what Wall Street insider Charles Payne really thinks? Get more behind-the-scenes insights, valuable market research and hands-on guidance including live stock recommendations from Fox Business’s rising star. Charles Payne’s Smart Talk is absolutely FREE for a limited-time only. Sign up today!
