Wall Street’s Games – Loving Google and Hating Apple?

goog vs aapl 

Everyone wants to own the next Google or Apple, but it is easier said than done. Fifteen years ago, Google did not even exist and Apple was on a brink of bankruptcy. The next Google or Apple might not have been started yet.

Today, Apple and Google are among the most innovative and powerful companies in the world. Both have a market cap of about $400 billion – actually Apple is at $450bn., but Google is quickly closing the gap. Both are immensely profitable and have plenty of cash in the bank to buy anything they want. And yet, it seems that Wall Street treats them very differently. Apple is currently trading at a P/E of 12, while Google at P/E of 33. It is said that the P/E ratio (Price to Earnings) is a measure of market expectations. Why does the market expect so much more from Google than from Apple?

Last week, Apple beat analysts’ earnings estimates. As always, it guided next quarter’s numbers conservatively and the market did not like it. It feels like the market is looking for a reason to reprimand Apple. Wall Street wants to see growth and it has long realized that with the current product line, Apple will have hard time growing. Not that it has to grow. Apple just sold 51 million iPhones last quarter and it continues to be a well-oiled, cash-printing machine. It earns $13 billion per quarter and it has $160bn in the bank – who would not love to have problems like these? Apparently, many shareholders. Since Apple announced that it will resume paying a dividend in March 2012, it has lost almost 15% of its market cap. (the paid dividends are a drop in a bucket compared to the capital loss)


In the meantime, Google is spending like a drunken sailor and the market loves it. Google missed earnings estimates last quarter and its stock still went higher. Wall Street currently loves Larry and Sergei. First, because they have delivered and made their shareholders richer. Second, because those two are not afraid to go chase after crazy dreams. Google is aiming for the moon. It is buying robotic and artificial intelligence companies, it is developing the most successful wearable technology yet – Google Glass, it is working on driverless car technology, its core ad business is booming. Google invests in dreams. Wall Street loves brave companies, at least as of right now.

“If you want to be long innovation, you should be long Google” – said Stanley Druckenmiller a few months ago. Apple is also innovating, but not at a pace that Wall Street likes and expects. It seems, Wall Street is using different criteria to measure Google and Apple and it is a lot stricter to Apple. Do you know why? Because, the companies have different type of core investors. Google is owned predominantly by growth investors and technology enthusiasts, who are willing to close their eyes for an earnings miss, because they expect a lot brighter future. Apple is predominantly owned by value-oriented opportunists, who want to make money now – therefore every little mistake is noted.

Don’t get me wrong. Apple is not going anywhere. Everyone, who has ever tried a Mac, is never going back to a PC. People, who use iPhones like them enough, not to consider switching. Apple is a great company that sells great products, but is it a great stock at these levels? Some very smart investors like Carl Icahn seem to think so and are putting their money behind their mouth.  

Disclosure: long Google.

When Declining Correlation Meets Rising Volatility

This Market Review was originally published at socialLeverage50.com on Jan 18.

The best (biotech, solar, cloud) and the worst performers (gold and silver miners) from last year are shining in early 2014.

The long bond ($TLT) is rallying all of the sudden. Is it a sign of people getting more defensive.

The S & P 500 lost 27 bps for the week, but under the illusionary calm surface, there was a lot of action. The SL50 list gained 1.19%. It was up more than 2%, before it pulled back on Friday. High-growth, high-beta stocks are leading indicators and we judge risk appetite based on the action in them. It has been a stock pickers’ nirvana with incredible opportunities on the long and on the short side.

We are seeing a huge uptick in volatility and drop in correlation at the same time. The drop in correlation is a positive sign and often a natural side effect of entering into earnings season. The uptick in momentum stocks’ volatility is a warning and usually a precursor to a market pullback.

The initial reaction to earnings reports indicates that this market will be merciless to missing estimates.

There has been notable relative weakness in consumer related stocks – save for $AMZN, retail stocks have been hit with a shovel in the head. Now, restaurant stocks are also starting to show signs of deterioration.

The biotech sector ($IBB) is over-bought and it is very likely to consolidate through time or price in the very near-term perspective. Where will the new leaders come from?

The first reports from the financial sector have not been inspiring and the averages continue to consolidate through time. Semi-conductors attempted to take the lead, but were shot down by a weak Intel numbers on Friday. Nevertheless, there are some very noteworthy developments in the sector and major positive price action to pay attention to: $INVN$SWKS.

Chinese and U.S. Internet stocks continue to deliver for the most part. The big picture catalyst is clear – no matter what happens with the general economy, the Internet sector is likely to continue to grow. Everyone knows that and it might has already been discounted in a way. During general market pullbacks these stocks will hardly remain impenetrable fortresses, but dips there will be most likely welcomed as buying opportunities.

Marketing svs stocks have been on fire as corporate America might be finally ready to open its wallet and spends some its cash: $FUEL$MKTO$CTCT.

Another industry that is a candidate for the biggest surprise of 2014 is education svs. Highly shorted, and hated, vulnerable to disruption from the new app world, yet near 52-week highs and gaining momentum. These were some of the major characteristics of solar stocks in 2013 and homebuilders in 2012. There are no education svs stock on the SL50 list, but we are keeping a close eye on the industry: $APOL$CECO$ESI$EDU$XUE, etc.

Earnings season has just started and over the next month thousand of companies will report earnings. By default, the SL50 list rebalanced once a week, so we will likely see gaps in both directions as always. In a good market, the upside gaps are a lot more as even “bad” news is “good” and surprises tend to follow the direction of existing trends. In a deteriorating market, we see a lot of negative gaps among momentum leaders, which is a major leading sign of risk appetite reduction.

We are seasonally in a strong period for the general market, but this does not guarantee that we cannot see a 10% pullback and maybe this is exactly what the market needs to shape up some new, good risk/reward opportunities. For swing traders, it makes sense to decrease your position size a bit here.


Why Are Biotech Stocks Outperforming By So Much?


Biotech stocks have gone parabolic over the past year, to a point that many have started calling them a bubble. Here’s the thing about sustained market trends – they always have an explanation, they always have a catalyst. In this case, I don’t refer to our natural desire to live longer and healthier in a world that is aging quickly. There is one very simple reason why healthcare stocks have become a bastion of momentum – The Affordable Healthcare Act.

Under Obamacare, there are more people with health insurance and therefore more people being able to afford expensive drugs – subsidized by the taxpayers. The system is not sustainable in the long-term, but it will boost many biotech companies’ cash flows in the next few years. The stocks market has been discounting exactly that.

The trouble with healthcare names is that many people are afraid to touch them for anything more than a quick trade or dedicate a sizable part of their portfolios. Biotech stocks are considered too volatile, too explosive, too unpredictable. In any given year, usually the best and the worst performing stocks come from the biotech sector. From one side of the coin, you could have $JAZZ, which went from $1 in 2009 to $150 today. From another, one day you could wake up to a 50% haircut if your company’s drug does not get a FDA approval. Not all biotechs are from the same pond.  $JAZZ didn’t get from $1 to 150 overnight. It has been consistently trending for 5 years. It has been consistently growing its earnings.


They say that the biggest opportunities are outside of your comfort zone and the juiciest market returns are where very few are willing to go. We all feel more comfortable investing in businesses we understand, in products we can touch, services we can experience. There is nothing wrong in that. This is the approach that helped Peter Lynch make a name for himself. The big question is, are we not missing big time on some incredible opportunities by focusing only on what we understand and can explain? Doesn’t it make sense to dedicate part of our portfolio to stocks, we like only because of the price action and nothing else? I don’t know about you, but for me it does.