Apple’s stock price has been on a tear.
All you have to look at are the comments made by most analysts about two to three weeks ago; it becomes obvious that most were not expecting the strong move in Apple’s AAPL, -0.97% stock.
When I wrote that the next milestone for Apple stock would be $250, the shares were trading at $197.75. Since then the stock has risen by about $20. My call was not met with enthusiasm. Many were expecting the stock to pull back after earnings. Others sold shares on the news that Apple had reached a $1 trillion valuation.
Defensive measures for those who had just bought the stock and had small gains were needed because of a credible report out of China that Apple could become a pawn in the trade war. In spite of that threat, our call for long-term holders has been to continue to hold.
For the sake of full transparency, please click here to see the annotated chart of Apple that was published at the time of the call when Apple stock was trading about $20 lower from the recent high. Our call for a breakout has proven spot-on.
The Dog of the FAANGsThe Dogs of the Dow is a famous strategy.
But these days the market leaders are the FAANG stocks — Facebook FB, -0.75% Apple, Amazon.com AMZN, -0.29% Netflix NFLX, +3.46% and Google holding company Alphabet GOOG, +0.57% GOOGL, +0.50% I have not heard anybody talk about it, so I might as well coin the phrase “Dog of the FAANGs.” Let us explore the merits of the Dog of the FAANGs strategy with the help of a chart.
ChartPlease click here for an annotated chart comparing Apple to Netflix.
• The Dogs of the Dow strategy calls for annually buying the 10 Dow Jones Industrial Average DJIA, +0.35% stocks with the highest dividend yields.
• When applied to the FAANGs, this calls for buying Apple. An argument can be made that this line of thinking is flawed and dividends should be ignored in FAANG stocks because they are growth stocks.
• If you buy into the above argument against Apple, simply look at the comparison between Apple’s share price and Netflix’s share price.
• Netflix was the leader of the FAANG stocks based on price action until it reported earnings and the stock fell.
• The chart shows Netflix outperforming Apple by 25.8% at one point.
• Apple was a laggard among FAANG stocks based on price action.
• After earnings were released, Apple’s stock rose.
• As the chart shows, Apple has now outperformed Netflix by 20.7%.
• The chart proves that the Dog of the FAANGs has beaten the champion of the FAANGs.
Important takeawayAsk yourself two questions. Has Apple all of a sudden become so much better as a company to justify the big share-price increase? Has Netflix all of a sudden become so much less of a company to justify the big share-price decline? If you have expertise in business valuations, your answer will be a resounding “no.” So what caused those two big stock moves? The answer is one word: sentiment.
At extremes, sentiment is a contrary indicator. When sentiment becomes overly positive, anyone who is likely to buy the stock would have already bought it. The slightest amount of selling can cause the stock to fall because there are not any buyers left. This is exactly what happened to Netflix when it reported earnings and concerns rose about user growth.
Going into earnings, sentiment on Apple was negative. Those who were going to sell had already sold. When earnings showed growth in services, buying pushed the stock much higher than would have been expected because there were no sellers left.
The takeaway is that in the short- to medium-term, sentiment often becomes the most important factor.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
