During this article, I will analyse some of the most popular news stories of the week.
Some expect the stock to go higher, including some that the article cites.
As the article says “Despite Apple surpassing a valuation of $2 trillion last week—becoming the first U.S. company to do so, Morgan Stanley analysts argue that the tech giant remains undervalued, raising their price target for the stock to the highest among major Wall Street firms.
Apple’s stock skyrocketed to new all-time highs last week, gaining over 8% and now trading at just over $500 per share.
Despite its high valuation, Morgan Stanley analysts are still bullish on Apple, raising its price target for the stock to $520 per share from $431—now the highest of any major Wall Street firm, according to FactSet.
At 25x free cash flow, “Apple trades at a discount to both tech platforms and strong consumer brands,” Morgan Stanley’s note said.
The analysts point out that Apple’s free cash flow has grown more than 20% annually over the last four years, despite a slowdown in iPhone sales: “These results underscore the strength of Apple’s broad ecosystem of products and services, a change from past years where Apple was more reliant on the success of the iPhone to drive growth.”
Morgan Stanley said that those results also demonstrate the “increasing engagement and stickiness of Apple’s customer base.”
The firm believes that Apple can “continue to outperform peers and the S&P 500 in the near term,” thanks to two upcoming catalysts: A 4-for-1 stock split at the end of this month and the launch of the first 5G iPhone in October.
“We increasingly believe that Apple should be valued like a technology or consumer platform, rather than a more cyclical hardware company,” Morgan Stanley’s note said. “Apple proves that a more diverse portfolio combined with loyal customers and increasing engagement translates to more secular, not cyclical growth.” The analysts estimate that in a base case, between 2021 and 2026, the company will grow its revenue 8% annually and earnings per share by 11% annually.
WHAT TO WATCH FOR
Morgan Stanley analysts also shrugged off the company’s ongoing legal battle with Epic Games, the developer of Fortnite, calling the loss “immaterial” to Apple’s revenue base. The Fortnite app generated an estimated $130 million of revenue for Apple in the last twelve months, which equates to roughly 0.04% of Apple’s total revenue base, the analysts note. “Entire industries have been created because of the App Store,” they said, pointing to high-profile examples such as Facebook, Uber, Instagram and Grubhub. What’s more, based on data from Sensor Tower, customers are spending more than ever in the App Store: Total spending was up 25% year-over-year in the twelve months ending July 2020″
Analysis of article
Apple is a robust business that is clearly benefitting from the trends after lockdown, as are the FAANG stocks more generally.
Unlike some firms in the technology space that are soaring despite not making any profits, Apple is clearly not in this category.
However, the article fails to mention another trend. As more money is going into the indexes such as the S&P500, Nasdaq and Dow Jones, some of that money will naturally go into big tech.
In general, it is a huge mistake for most individual investor to stock pick, or assume they can see trends.
Apple could double from here or fall hard. They almost failed in the 1990s, and could do again.
It makes sense to own a broader based technology index, like the Nasdaq, and hold it for the ultra long-term, rather than speculating on individual names.
We shouldn’t forget that the risks are higher than before now that Apple is valued so highly.
On various measures, including numerous p/e ratios, Apple is now much more expensive than before.
That shows that even though Apple is making more money than a year ago, their stock price has increased by a larger percentage than that revenue jump.
The next year will certainty be interesting for Apple’s stock.
Nasdaq and S&P500 at record highs
The S&P500 and Nasdaq, by comparison, have hit regular record highs in the last few days and indeed weeks.
“The S&P 500 and Nasdaq Composite clinched fresh closing and intraday records on Monday, as hopes for a potential COVID-19 treatment bolstered trading for more growth-sensitive sectors that have lagged the rest of the market.
What drove the market?
Equity investors snapped up a broad range of U.S. stocks on Monday, from airlines to technology darlings, a day after the Food and Drug Administration said it approved the use of convalescent plasma, the antibody-rich component of blood taken from recovered COVID-19 patients, as a treatment for serious coronavirus cases.
“It does seem to be related to potentially favorable news over the weekend regarding treatments, and general optimism about the possibility of a coronavirus vaccine,” John Carey, Amundi Pioneer’s director of U.S. equity Income, told MarketWatch. “It’s a broader-based market advance, with both cyclicals and growth stocks moving upward.”
The new bout of optimism helped beaten-down cyclical sectors, including shares of energy and industrials, areas that would benefit from a faster economic rebound. Energy shares led gains on the Nasdaq and S&P 500 Monday.
“There is a rationale for some of these cyclical stocks to do better on the hopes or expectations of vaccines being developed. But I do think it’s still a bumpy road” for the economic recovery, said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, in an interview”
It would be a huge mistake to try to trade markets based on a vaccine or the upcoming US election.
People made that mistake during SARS and indeed the 2016 US Election, when many people feared investing due to Trump.
What makes sense is to hold a diversified portfolio, which can weather any storms long-term.
For most people that means holding both bonds and stocks in one portfolio, and rebalancing from one to the other when market conditions change significantly.
2020 of all years has shown us that nobody can predict the future of the markets, and that bonds aren’t dead.
Government bonds, at least the short-term ones, did especially well during the worst of the March crisis, which once again illustrates the importance of having diversification in your portfolio.
Despite this, many media organisations are reliving the mistakes of 2016, with Business Insider trying to predict how the US Election could affect the markets and gold.
Stock market strategists have long advised customers on how to invest before a US presidential election. UBS is now preparing clients for a contested result.
President Donald Trump faces numerous headwinds in his bid for a second term. He’s consistently polled below presumptive Democratic presidential nominee Joe Biden. The Trump administration’s approval rating has steadily fallen as the coronavirus pandemic continues to roil the country. Even Trump’s favorite bragging point — the US economy — has tanked and remains mired in recession.
That combination of hurdles may lead the president to take a variety of actions to contest a Biden victory, Thomas McLoughlin, head of Americas fixed income at UBS, said Monday. If election day passes without a clear winner, investors should brace for strong market volatility and pivot to stabler assets, the bank added.
“To the extent that President Trump makes up ground and the election is close, the prospects for a delay in an announcement of the winner becomes a real possibility,” McLoughlin wrote.
He continued: “Markets abhor uncertainty, so it is reasonable to expect safe havens such as gold and US government securities to offer some refuge.”
The best precedent for judging how markets may react is the 2000 presidential election, according to the bank. The related recount and Supreme Court decision delayed Vice President Al Gore’s concession for six weeks after election day”.
When you have been doing this job for a while, you see the same trends and stories over and over again.
Namely, media organisations fear-mongering and claiming correlations exist which simply don’t in reality.
In 2016 the media was warning about “overvalued markets” and the possibility of Trump and Brexit affecting markets. Most major stock markets soared.
In 2018, the media warned about North Korea affecting the stock markets. Markets rose again.
They also rose during the 2018-2019 US Government shutdown, and recovered more quickly from the Coronavirus situation than almost anybody expected.
Don’t try to predict, or trade, elections as Buffett and others have said, even though we will likely be bombarded with articles trying to predict the future of markets if Biden or Trump win in November!
In fact, we will likely be bombarded with analysis every time markets decline. In late 2016, every decline was accompanied by an analysis suggesting that the polls had affected stocks!
Finally, the Guardian has reported that some major investment companies have dumped some big fossil fuel companies.
A Nordic hedge fund worth more than $90bn (£68.6bn) has dumped its stocks in some of the world’s biggest oil companies and miners responsible for lobbying against climate action.
Storebrand, a Norwegian asset manager, divested from miner Rio Tinto as well as US oil giants ExxonMobil and Chevron as part of a new climate policy targeting companies that use their political clout to block green policies.
The investor is one of many major financial institutions divesting from polluting industries, but is understood to be the first to dump shares in companies which use their influence to slow the pace of climate action.
Jan Erik Saugestad, the chief executive of Storebrand, said corporate lobbying activity designed to undermine solutions to “the greatest risks facing humanity” is “simply unacceptable”.
Storebrand will also divest from German chemicals company BASF and US electricity supplier Southern Company for lobbying against climate regulation, and a string of companies that derive more than 5% of their revenues from coal or oil sands.
“We need to accelerate away from oil and gas without deflecting attention on to carbon offsetting and carbon capture and storage. Renewable energy sources like solar and wind power are readily available alternatives,” he said.
“The Exxons and Chevrons of the world are holding us back,” he added. “This initial move does not mean that BP, Shell, Equinor and other oil and gas majors can rest easy and continue with business as usual, even though they are performing relatively better than US oil majors.”
ExxonMobil lobbyists met key European commission officials in an attempt to water down the European Green Deal in the weeks before it was agreed, according to climate lobbying watchdog InfluenceMap.
Saugestad said he expects Storebrand’s investor peers will follow its lead in divesting from companies that support anti-climate lobbying “as part of a logical progression in global fossil fuel divestment”.
InfluenceMap has previously found that five of the largest listed oil companies – including Exxon, Chevron, Shell, BP and Total – spend about $200m a year lobbying to delay, control or block policies to tackle climate change.
It seems that Environmental, Social, and Corporate Governance (ESG) investing will be a major trend in the next 10 years, after being a fringe issue until relatively recently.
Even investors that aren’t moralistic might try to jump onto this trend, and be encouraged by the decisions made here by these investment companies.
The world can’t move completely away from oil right away, but investors might jump on this new investing trend.
Trends can be dangerous though, with super-high valuations seen before during the 1990s technology boom.
Many people also (wrongly) assumed that “peak oil” would result in $200-$250 oil prices over 10 years ago, showing how difficult predictions are.
Will ESG stocks be the next FAANG trend? Who knows, but it could go that way.