One of Wall Street’s oldest adages played out in full fashion last week when Apple (AAPL) rallied more than 4% leading up to its highly-anticipated September 9 event only to pull back when the news — which I believe was all quite good — hit the market.
And so, “buy the rumor, sell the news” comes true once again.
The tech sector, and tech stocks 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 SPDR (XLK) declined to a level not seen since October 2013.
The ETF fell as low as $31.32 on August 24 before turning around and rebounding more than 20% to close the following day at $37.65, its lowest closing price since October 17, 2014.
A lot of big tech stocks took a hit on August 24: Facebook (FB) fell 16% to its lowest point of the day, with AAPL (-13%), Yahoo (YHOO, -12%) and GoPro (GPRO, -11%) not far behind.
Other big tech name pullbacks to note include Google (GOOGL) at an 8% decline and Microsoft (MSFT), which fell back 5%. 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.
This is how rallies are tested and must be tested. Right now it feels like the dust is settling, although the overall bias for the market is to the downside, including technology. The emotionally-fueled and computer-aided August 24 swoon should only be re-tested on poor fundamental news, not as a requirement because the technicians say so.
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 as 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 SPDR (XLF) will bring in a lot of sideline money. Through $25.50, we’ll start to see the momentum 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
All of this takes me back to another axiom, the number one axiom in investing: buy low and sell high.
That means you should be ready to buy. Here’s a checklist of some things to look for that could make it easier:
- Leadership
- Execution
- Market Share Gains
- Momentum/Chart Formations
On leadership, there are the big names that have led the parade for years. Apple is one of them, and I think the reaction to last week’s event will tell us a lot about what to expect from the tech sector in general.
While the stock did pull back, I suspect it’s simply a case of an old adage taking shape in the modern investing world.
AAPL’s New Look
Apple CEO Tim Cook unveiled the company’s newest products at the 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 “S” 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 last 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 for which many say there’s a tremendous demand. By the way, 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 is up today.
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.
“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,” said Mark McLaughlin, president and chief executive officer of Palo Alto Networks. [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.
