This week will be of massive importance to the equity markets. We have the biggest companies on the planet all reporting together. This gives it the potential of huge moves, but the problem is that they go in either direction. This means that the human element is unpredictable and there might be mega-cap stocks to buy on the dips.
Most investors believe that the companies will deliver strong earnings. I agree but the overnight stocks will move because of sentiment, not results. Excellent reports do not necessarily mean rallies.
I am very confident that the fundamentals remain strong for the large corporations. The recovery from the novel coronavirus pandemic is going well. In addition, the economy has help from the most aggressive Federal Reserve ever. The White House has also already spent $1.9 trillion with $2 trillion more brewing. The money printing presses are in full tilt, and for now, it is a tailwind to stocks.
In the end, there will be a giant bill due but, for now, investors don’t care. The immunization process is going well in the U.S. so people will be doing more this year. Even though millions are working from home, there hasn’t been a tangible detriment to productivity. It turns out most people can work telecommute and still function at their jobs. The long-term effects of this are still a question but, for now, it works.
Demand on products and services has been very strong because the consumers are spending. We are in a Goldielocks scenario where things are great again but the doctors are not stopping the morphine drip. Eventually the economy needs to ween itself off the monetary and fiscal drugs. It may already be too late after the flip of December 2018.
The Fed was already exiting the QE back then, but Jerome Powell decided to reverse course and restart the strongest QE ever. This year, the Fed’s bond buying program will contribute $1.4 trillion in liquidity. This Wednesday after they meet, they will remind us how they don’t plan on changing course through 2023.
Meanwhile, the short-term reaction to the earnings starts with Tesla (NASDAQ:TSLA) tonight. Expectations matter more than facts. Pick any mega-cap stock’s record of pops versus earnings drops. You will find about as many up and down short-term moves. These companies rarely deliver bad reports, so I expect the reaction split more like 90% up and 10% down.
The three mega-cap stocks to buy on a dip this week are:
Mega-Cap Stocks to Buy: Apple (AAPL)
Apple still is the benchmark for most investors and the leader of mega-cap stocks. Perception is that it’s the greatest company in the world. It’s easy to see why even if it’s not the shiniest start of late. It’s hard to argue with $60 billion in yearly net income. I am not a fan of the leadership but I definitely favor buying the dips.
When the markets are dumping it in panic, buying AAPL stock is an easy bet to make. Those who did that earlier this year on the dips into $118 per share had easy profits. A hiccup reaction from earnings could take it there again. If so, it would be a rinse-and-repeat process for smart money.
I am not calling for a crash on earnings. History shows that it’s a coin-flip outcome, just look left on the chart and verify that fact. This week, if the investors throw AAPL stock away, then I will be picking it up. Earnings even aside, at these levels, it’s not an obvious point of entry. In the long run it will rally with markets, but I prefer more favorable odds on slightly midterm time frames.
Contrary to many experts in the media, it is OK to trade around the Apple price action. There isn’t a one-size-fits-all method and that goes for the other two tickers we discuss today. I believe in all three long term and I am willing to trade in and out on big swings.
Amazon (AMZN)
Before I discuss AMZN stock I’d like to point out that this is a rinse-and-repeat concept. Early March, when markets were selling tech, I called to buy-the-dip in them. AMZN was under $3,000 per share then. The process works.
Jeff Bezos and his team at Amazon get my vote for the best company ever. They are a perpetual startup that never stopped growing delivering 30% year-over-year for a decade. They ignored critics and they stuck to their plans. Thank goodness they didn’t dial back their spending, else the world would have not had the cloud.
I can’t imagine a scenario where they deliver a bad earnings report. The caveat is that we need to form our own opinion of that. Experts often mislabel a report as bad for this company. It is alright for management to miss on earnings. What matters most is “growth” not profitability. I would buy AMZN stock if it falls on such a headline.
I do have a warning on that front and it involves managing expectations. During the pandemic, a few stocks like this one soared. Zoom (NASDAQ:ZM) is the other poster child for that. They are Covid stocks, meaning the lockdowns catapulted their businesses into the clouds – pun intended. The warning comes from the fact that this is their full first quarter to roll over pandemic comps.
I had the same warning for Netflix (NASDAQ:NFLX) and indeed people weren’t ready for the let-down. Amazon this quarter has to report and beat numbers from last year that were very strong. Up until now, they were still reporting over 2019 or pre-pandemic performance. Once again my fear is based on human sentiment, not company facts. They will crush it! Netflix did and the stock fell 10%. It grew earnings by 139% and sales by 24%. Those are absolutely strong scores but they “expected” more.
Mega-Cap Stocks to Buy: Facebook (FB)
Facebook management can’t seem to stop making public opinion mistakes. It’s hard to avoid scrutiny when you have more than 3 billion users. The experts drummed up every headline skirmish they’ve had like it’s the end of it. But each dip was an opportunity to buy FB stock from panic and ignorance.
It’s hard to mess up the potential of half the world. They can sell cotton candy and thrive. The fundamentals are beyond reproach. They doubled their revenues since 2017. Their are now delivering $30 billion in net income. Moreover, the stock is not carrying a premium for it. It has a 9 price-to-sales and a 30 price-to-earnings. This is about as cheap as Apple and it delivers better growth metrics.
The owners of the FB stock are realistic about their expectations. But on headlines, they have acted weak before. If they sell it off on ridiculous comments after the earnings, it’s worth buying on the dip. Technically, the stock is now in a breakout mode and consolidation over the neckline.
Long term, Facebook will be leading any bull market. If the dip doesn’t come this week, momentum can take it to $340. Basically the strategy for this year is buy the dip if it happens, else chase the rip.
Mega-cap stocks are a giant part of the overall market. How investors will react to their earnings is important to the whole bull market. The authorities will do their best to keep this rally alive so they have a tailwind from that. Shorting them goes against logic and can be dangerous. On the other hand, when things are going this well it is good to be somewhat cautious. Investors should keep balance in their portfolios.
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.
