GVA Research on Nightly Business Report: A Big Week For Tech Earnings
Tech – Buying Opportunity Potential Limited By Currency War Prospects:
Off the back of reassuring developments (e.g. positive U.S. Dec 2015 employment report, China limiting insider sales and scrapping circuit breakers), the burgeoning panic permeating the markets since the start of 2016 trading has momentarily dissipated and the tech sector among those advancing. The question for investors is whether they should “buy the dip”. Since the start of 2016, market action indicates investors are opting instead to “sell the bounce”. With the Federal Reserve likely to continue monetary tightening off improving U.S employment trends, look for the U.S. dollar to remain strong. Meanwhile, with China having to allow market forces greater determination of the value of the yuan following its inclusion by the IMF in the SDR currency basket, the prospects for further currency depreciation is high. The knock-on effects will be capital market instability and capital flight from China. For sectors such as technology that have a relatively high portion of non-U.S. dollar denominated revenues, the prospect of competitive currency devaluations in Asia should keep investors cautious, especially as foreign exchange hedges limiting the effect of the strong U.S. dollar are running off. The 2016 modus operandi will be “wait for the drops” to add selectively to positions.
Tech – 4Q15 Earnings Season Likely To Offer Another Bounce:
With December 2015 quarterly reports coming next week (Tues 1/26 AAPL; Wed 1/27 FB, GOOGL; Thurs 1/28 AMZN, MSFT; Mon 2/1 PYPL), there is the potential for a tech stock bounce as expectations tend to be trimmed heading into actual reports. Nevertheless, the flow of negative pre-announcements from suppliers to AAPL (e.g. Cirrus Logic (CRUS), Qorvo (QRVO)) raises fears the slowdown may be more than just a pause in advance of the expected introduction of the iPhone7 in September 2016. Note that iPhone sales in China were the source of AAPL outperforming September 2015 expectations. With heightened uncertainty as to China’s economy, investor confidence has been shaken in the strength of the Chinese consumer to purchase the premium product the iPhone represents. Investors should focus on the fact that product cycles generally bolster AAPL stock returns, so here is a stock price pullback to pay attention to. Away from AAPL, tech sector trends away from smartphone penetration remain intact with online advertising, social networks, cloud computing, cybersecurity and mobile payment systems areas of focus. To that end, Amazon (AMZN), Facebook (FB), Alphabet (GOOGL) and PayPal (PYPL) may be traded ahead of the coming results.
Tech – Sector Pullback Offers Possible Entry Points For Dominant Companies Investors Should Own Long Term:
With both the S&P500 and the tech sector off -12% from 52-week highs amid concerns of slowing economic growth, valuations are starting to become more attractive. In the present environment of growing recessionary concerns, investors should consider large cap stocks first and foremost before going further out the quality spectrum. In this regard, best to consider those companies in the technology sector that are successfully supporting an increasing range of daily activities for consumers and businesses alike as these should be the companies to demonstrate superior growth relative to the overall economy as well as other companies in the sector. We view AAPL, AMZN, FB, GOOGL, MSFT & PYPL as companies that fall into this preferred category of dominant companies investors should buy at lower levels.
For further analysis, please see table below: