This week has the potential to be epic. The economic calendar is jam-packed with events. Last week it was the mega-cap stocks show; this week we get important economic reports including October jobs. The U.S. Federal Reserve will also have their headlines mid-week. Oh, and there will be many headlines coming from the U.S. presidential election race.
On that front, last week was the biggest earnings week in recent history. Most mega-cap companies reported in one day. While Wall Street took it in stride, there were a few wrong investor reactions to address today. The idea is to find opportunities in what others regard as fault. Some of those are obvious, while others are more subtle.
Investing requires finding equities that have more upside potential than downside risk. The timing matters and in this case we will make the assumption that we are looking for a long-term investment. The decision to buy into dips relies heavily on that. What makes sense for a thesis looking out a decade may seem ridiculous short term. After all, it is easy to nitpick a line item based on short-term expectations.
More often than not, the disappointment in the price comes from misaligned hopes. Hardly any of the major large-cap stocks had bad results. Therefore, the temper tantrums that investors are throwing will abate. The trick is to look through the bearish media headlines to find the gems.
With that said, here are three mega-cap stocks that are worth taking a look at now:
Mega-Cap Stocks to Buy: Amazon (AMZN)
Last week Amazon reported earnings and the commentary from the so-called experts was flabbergasting. Under the leadership of Jeff Bezos, this team triple-topped revenue expectations and beat last year’s by 37%. After ten years it still grows this fast, yet they still find fault and that’s mind boggling. The main complaint they had was that Amazon Web Services’ (AWS) growth fell to 29%. To complain about a metric like this inside a home-run quarter is insane. This is a flagrant mistake on behalf of investors who believe it.
There was nothing bad about this earnings report to warrant selling AMZN stock. If there were no jitters from politics it would have soared. Amazingly, the complaints about its low margins are making a comeback. In reality the sales mix doesn’t matter much. In the end, they delivered $13 earnings-per-share 67% above the estimate. These are numbers to celebrate, but for now they are being overly cautious about it. And therein lies the opportunity.
The dip so far is not big enough to consider it a worthy trade in size. Holding the stock from these levels will be profitable in the future, but there is no rush to load up. If the stock markets are higher 10 years from now, Amazon will be leading at. The current extrinsic uncertainties will probably cause more short-term downside. This may not be a perfect bottom, but it is definitely not a reason to panic out or short it.
For more than a decade the bears tried to short on this concept and they lost big. A relief rally will come after this month and it will remind the critics why they were wrong. Over time, there’s more upside potential than downside.
NFLX stock is almost as big a mystery to Wall Street as Amazon. The traditional metrics don’t apply because of the wonky bullish thesis. They spend too much money, especially on content. The number is close to $20 billion per year. That’s insane. However, it is a necessary evil and a key component of their strategy.
Management’s goal is to exponentially grow its subscription base. Because of U.S. saturation, the focus is now on global expansion. They currently have just over 100 million subscribers overseas in a pool of 7 billion people. Clearly the upside potential there is massive. The hook to get those subscribers is the content. Therefore, having so much of it is absolutely necessary.
Critics of Netflix warn against the wave of competitors chasing it. They are fearsome like Apple, Amazon and Disney (NYSE:DIS) and a slew of other smaller media companies. However, Disney is the only competitor that can give it a run for its money on content. Therefore, it will be a long time before they materially limit its potential. There will be enough room for all of them to prosper for years to come.
Netflix has the first-mover advantage and it will remain in the lead for a long while. Every parent on the planet will be under pressure to subscribe to Disney’s plus service. They won’t cancel their Netflix subscription to do that. They will need both because the kids demand one, and they absolutely want the other.
Judging NFLX stock by traditional metrics is a mistake. It’s impossible to capture the concept we just presented by looking at a price-to-earnings ratio. It’s high at 76x, but it’s more important to look at the price-to-sales ratio. Currently, Netflix shares only have 9 years of hope baked into them. This is in-line with all the mega-cap stocks. For an absolute comparison, a crazy metric would be something like Zoom Video (NASDAQ:ZM) or Shopify (NYSE:SHOP). Their price-to-sales ratios are 112x and 60x, respectively.
Investors should own Netflix for its long-term opportunity. Meanwhile, they have to sit through fast moves. It would make for a good buy opportunity here and into $430 per share.
AAPL stock is my least favorite as a concept. This is not a knock against the quality of the stock itself, but rather Apple’s management. Tim Cook could’ve done so much more with the potential the company has. Imagine what a CEO like Amazon’s Jeff Bezos or Salesforce’s (NYSE:CRM) Mark Benioff would’ve done with it.
Arguably, Apple is the best company on the planet. Somehow they have convinced their clientele that they are stuck in an ecosystem to the point where they gladly pay a premium for everything. Part of it is creating the concept that it is far above anything else from the competition. Whether this is true or not doesn’t matter because perception is reality.
I am biased towards non-Apple products just because of personal preference. I acknowledge that they have slick products, but they’re just not for me. On the other had, most Apple fans think that everything else is garbage. That’s an opportunity because deep-rooted beliefs like this make for a great bullish thesis.
For as long as management delivers consistently well on its promises, its success will continue. This makes it a buy at any dip for the long-term.
Like most mega-cap stocks, last week AAPL stock suffered losses. While I was not rooting for it to bounce, I was eagerly awaiting it to fall into strong support. Below $110 per share it makes sense to accumulate shares for the long term. If this week the markets falter and Apple falls it would also make a good swing trade opportunity. Any way you slice it, it’s a buy here or within 5% lower.
The technical experts forecast a collapse closer to $90 per share. This could happen, but only if the entire stock market crashes. Regardless of the reason, savvy investors should not panic in any of the scenarios. Eventually money will come back into it because it is still king of the mountain.
Today’s goal was to find opportunities where others find fault. Sometimes it’s difficult to do so but in these three cases it was fairly easy. There is no question that all three businesses are very successful. Any persistent selling is likely extrinsic not systemic. Therefore, downsides are limited in time and size. Apple, while the least of my favorites in this group, has the least tangible downside risk.
There’s also one potential IPO to worry about and that is ANT Financial. Experts predict that it will be the mother of all IPOs. If there indeed will be $1-trillion-worth wanting to buy the shares, that money has to come from somewhere. The risk is that they sell other mega-cap stocks to allocate to ANT Financial positions.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.