Behind The Street - Issue #12
JANUARY 28, 2021
JANUARY 28, 2021
BEHIND THE STREET NEWSLETTER
It has been an action-packed week on Wall Street.
VOLATILITY is back along with earnings reports from some of the largest S&P 500 and NASDAQ power houses such as $AAPL, $MSFT, $NOW, and $TEAM.
INDEXES
All of the major indexes are sitting below their respective 200 day moving averages, but signs are showing for a likely rally back to the 200 day. Volume has been picking up, but indexes has been mostly flat, a clear sign of accumulation. Since January 12th price declines have been widespread with individual technology stocks feeling the most pain.
EARNINGS reports have been rolling in, the S&P 500 has traded in a tight range just under its 200-day moving average from January 24th – January 28th on heavy volume. As valuations have come down across the board and earnings have been coming in better than expected, institutional investors are starting to put cash to work in quality names.
(SEE photos attached of the NASDAQ, S&P 500, and Down Jones Industrial Average, showing a pickup in volume and price action sideways - flat. I suspect a rally back to the 200 day across the board)
STOCKS
$MSFT and $AAPL combined makeup just about 12% of the total Market Cap of the S&P 500 and over 8% of its earnings weight. It is critical for the health of the overall market for these two stocks to perform during earnings season. Luckily for investors both Microsoft and Apple delivered record numbers this week, both beating analysts’ expectations and delivering encouraging forward guidance
MICROSOFT reported EPS of $2.48 vs analysts’ projections of $2.31 on revenue of $51.73 billion vs $50.88 billion expected, solid beat on both the top and bottom line. Most notable, I like to look at Microsoft’s Intelligent Cloud division including Azure public cloud, server products such as windows server, and GitHub.
The CLOUD division produced $18.33 billion in revenue at a 25% growth rate. Microsoft also performed well in their productivity and business processes segment that includes LinkedIn and Office by generating $15.94 billion resulting in 19% growth.
$MSFT is what I like to call a true liquid leader. I
INSTITUTIONAL Investors need liquidity in order to build large positions without pushing up the price upon entry. A stock like Microsoft provides the explosive earnings and sales growth investors crave while providing the necessary liquidity to initiate and exit large positions without leaving behind a sizeable footprint. EPS is up 22% q/q and revenue is up 20% q/q, impressive for a company of Microsoft’s size.
MSFT also sports 47% ROE or return on equity and produces $80 billion in operating cash flow and is expected to surpass $100 billion in within the next two years. This is what you call an institutional darling among stocks. Earnings, sales, return on equity, and cash flow matter, and Microsoft checks all the boxes.
APPLE posted its largest revenue quarter in company history with $123.9 billion in revenue generated in a single quarter, analysts were expecting $118.66 billion.
EPS came in at $2.10 vs $1.89 expected up 25% year-over-year. Gross margins also came in better than expected at 43.8% vs 41.7%. An absolute monster quarter from Apple amid a global semiconductor shortage and supply chain bottlenecks. To top it off, CEO Tim Cook gave upbeat forward guidance alluding to the fact that revenue growth should continue to be strong in the March quarter as supply constraints start to show signs of improvement from December.
APPLE rallied 5% in after hours trading and continued to rally through the trading day on Friday in explosive volume. $AAPL now sits above its 50-day moving average and closed the trading say at $170.33.
COMMENTS ON MARKET ACTION
As we have talked about in previous issues of Behind the Street, it is important to pay close attention to leading stocks during a market correction. Look for relative strength amongst a weak tape, what are the stocks that are trying to fight the tape while all other stocks are going down? Stay away from the junk, stay away from stocks with no earnings or sales.
It is important to only pay attention to the very best stocks on the market, the companies who are blowing out their earnings, increasing their revenues, and generating the most free cash. When sticking to the CAN SLIM investment methodology you will more often than not focus on the most fundamentally sound companies on the market.
As a general rule, focus on stocks that are experiencing EPS growth of a minimum of 25%+ q/q and revenue growth of 25%+ q/q with 25% or higher ROR (Return on equity). To top it off make sure your stock has strong institutional sponsorship. Are the best money managers on Wall Street buying the stock? Is the top performing Mutual Funds owners of the stock or are they adding to their positions?
It is imperative to make sure large money managers on Wall Street are interested in the same stocks that you are interested in as Institutional Investors are the markets “Composite Operators” that will be pushing these stocks higher.
FOMC - POWELL
We had the absolute pleasure to hear from JEROME POWELL at the Federal Reserve on Wednesday as he kept interest rates near zero but signaled to the market that he would keep good on his promise to cut back on bond purchases as inflation rips across the nation. The FOMC noted that they would conclude their asset purchase binge in early March, making way for the first of many potential rate hikes.
As of today, the Fed’s balance sheet stands at $8.87 trillion. In my view the market has been pricing in at least three rate hikes from the Federal Reserve.
The market is a discounting mechanism after all, and it appears the market has severed valuations across the board to account for higher interest rates in the future. As earnings season continues to roll through, tech companies should continue to grow into their valuations over the next one to three quarters. Buying opportunities are just starting to present themselves. Always wait for a follow through day when buying individual stocks!
Let’s take a look at some charts.
$NOW is coming off the back of a fantastic quarterly report beating on both the top and the bottom line. CEO Bill McDermott stated that his business is built to perform in any market condition and expects forward growth to be even stronger than the latest quarter. ServiceNow generated $161 billion in revenue and EPS of $1.56, easily beating expectations with the help of 135 deal closures with $1 million or greater contract value in Q4 2021, up 52%. It is critical when analyzing Enterprise
SOFTWARE COMPANIES to pay close attention to deal closures with contract values over $1 million. The reason for this is because deals that come with a large contract value are usually sold to extremely large Enterprise customers,.
Think fortune 500 and fortune 50. Fortune 500 and fortune 50 companies have extremely long and complex sales cycles due to extensive diligence on new product buys. If you can close large enterprise business, your product is probably speaking for itself and will boost proof of concept.
$NOW is still sitting below its 200-day moving average but heavy volume is starting to pour in after that fantastic earnings report. The stock has likely found a short-term bottom here but price will need to break above and hold about its 200-day moving average to confirm a new uptrend. A break above $590.89 can be used as a new buy with a 7% stop loss if you are starting a new position. It is important to pay close attention to volume as price approaches this key level. ServiceNow’s 50-day stands at $606.28. (See chart attached)
$TEAM, and Australian software company reported solid earnings on Thursday sending the stock up 10% in after hours trading. EPS came in at $0.50 vs $0.39 expected on revenue of $688.5 million vs $641.3 million expected by analysts.
Atlassian had 10,000 new customers sign up in Q2 with over 50,000 in 2021 while generating strong free cash flow of $197.5 million on 29% free cash flow margins. From a technical perspective Atlassian is trying to form a cup basing pattern with price trading sideways for over a week on a heavy pick up in volume.
This means that shares are being absorbed by the market and we are finding a balance between buyers and sellers, with sellers no longer overpowering buyers. I am concerned that Atlassian is 164 points away from record highs, this is significant overhead supply and will act as resistance as buyers try to offload shares as prices climb back to their break-even points.
It may take some time for the market to work its way through all that overhead. A break above $396.63 is a great entry point for investors looking to initiate new positions, with a 7% stop. I am still long $TEAM as my total average cost is very low. I did offload some share late last year as price broke through the 50-day on higher-than-normal volume. (See Charts Attached)
Atlassian sports a 98 EPS rating, 82% ROE, and a 41% EPS growth rate with a 75 RS Rating. This is another example of a stock that has the strong fundamentals and liquidity necessary for Institution Investors to enter and exit positions. Keep an eye on Atlassian as the fundamental story looks health similar to ServiceNow.
VIX UPDATE:
The VIX rallied as high as 39.11 on January 24th but has since come down and settled at 27.65 as of Fridays close. This was the highest reading on the VIX since February of 2021.
We are not out of the woods just yet in terms of this correction. Major moving averages will now act as resistance as price makes its way back to the averages. The VIX may settle down for a few weeks and explode higher. It’s best to wait for a follow through day.
Today’s rally did show strong gains, but it was on lower volume than yesterday so it does not count as a follow through day unfortunately. You can look at the VIX here: VIX Index (cboe.com)
As of June 29, the following are the five largest S&P 500 index constituents by weight:
1) $AAPL - 5.89%
2) $MSFT - 5.63%
3) $AMZN - 4.07%
4) $FB - 2.32%
5) $GOOGL - 2.03%
DISTRIBUTION (Days where index sells off in heavier volume than previous day. Signaling institutional selling. 5 - 6 distribution days in the span of 4 weeks signals market weakness) Investor’s Business Daily
Current Distribution Count: Correction
Leaders up in volume: $CF
Leaders down in volume: $SIVB, $CSX, $NTRS
Thank You