GVA Research on Bloomberg Radio: Investors Should Focus On Dominant Companies To Own Long Term

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Tech – 1Q16 Earnings Season Proving Disappointing

With March 2016 quarterly reports coming out (Tues 4/26 AAPL; Wed 4/27 FB, PYPL; Thurs 4/28 AMZN, LNKD), there is the potential for a tech stock bounce as expectations tend to be trimmed heading into actual reports. Note, however, that so far large-cap tech results (e.g. GOOGL, MSFT) have proven disappointing in terms of growth, margins & guidance, such that the sector has underperformed the broader S&P500 by -275 basis points (bp) since Fri 4/15. To add to these concerns, the flow of negative pre-announcements from suppliers to AAPL (e.g. Taiwan Semiconductor 2Q16 revenue forecast falling short of estimates while indicating waning demand for >$500 smartphones) 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 expectations in prior quarters. 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) and PayPal (PYPL) may be traded ahead of the coming results.

Tech – Investors Should Focus On Dominant Companies To Own Long Term

While the tech sector has now underperformed the S&P500 from the 2/11/16 low (Tech (XLK) +11.9% vs. S&P500 (SPY) +14.1%), investors nevertheless need to be cautious in considering valuation and should concentrate their analysis on those companies to own over the long term. In the present environment of growing recessionary concerns, investors should own 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:

Screen Shot 2016-04-26 at 6.13.27 PM

Disclosure – Ownership:
Personal: PYPL
Family: AAPL, INTC, MSFT, PAY
Firm: AAPL, INTC, MSFT