Top Quant Assesses Amazon, Apple, And Alphabet

Each time the S&P 500 sets a new high, readers ask what they should do with Amazon, Apple, and Alphabet. I call them the Triple-A stocks because so many investors tell me they would never sell them until, that is, they dropped 25% to 35% in Q4 of 2018. Now that they have recovered, I asked Wayne Himelsein, who has beaten over 75% of all U.S. equity mutual fund managers for the past 15 years, to tell us should we be buying or selling Amazon, Apple, and Alphabet.

Ken Kam: The stocks people are asking about most are Amazon, Apple, and Alphabet. I know these are not in your portfolio right now, but with so many readers asking, can you give us your take on the Triple-A stocks?

Wayne Himelsein: It is completely apropos that I do so, as my core philosophy is, in fact, to study the interest of the crowd within the markets. In this case, where the interest of my own crowd of followers would like some thoughts on assessing the interest of the broader crowd, I am excited to offer my views.

Before we jump into the Amazon, Apple, and Alphabet, let’s start with the much broader technology index, the Nasdaq 100. I’m going to go so far as to say that as excited as we should be about the broader market making new highs, we need to look a bit more closely at the chain of events.

It was, in fact, the Nasdaq 100 that first broke through the October 2018 high on April 17th as opposed to the S&P 500 that took till April 29th, almost two weeks later. It might be argued that technology was the leader, and the rest of the market, the follower.

Kam:: That’s an interesting perspective. But can you really draw that conclusion from a single piece of information like who first made a new high?

Himelsein: I wouldn’t necessarily say this is any form of hard evidence as would be admissible in a court of law, as nothing in the stock market is purely evidentiary or by any means “scientific”, given the sheer number of possible data points and patterns to assess. More so, our pattern-seeking brains, built robustly to immediately recognize the faces of all those around us, does have a tendency to want to see things that it believes to be true or wishes to be true.

That said, from my personal experience, I have noticed an interesting relationship between new highs and the strength of stocks. In addition, I am further convinced when I consider this data-driven relationship in context, in the sense that the thesis is logical. Namely, that the demonstration of eagerness amongst buyers that push up a thing so aggressively that it reaches new heights seems to reasonably suggest that there’s something special about it. Likewise, if buyers push up one group of stocks before another group, it seems logically consistent with the crowd preferring the first group! The reasonability is compelling.

Kam:: It’s hard to disagree with that. So if I were to buy into that logic, I’d be convinced that technology is the leader. Is this what you have to say about the Triple-As?

Himelsein: Not necessarily. Let’s look at all three for this first top-down (or perhaps we should say with a “high lower”) view. Apple is still 10% off its Oct 2018 high, it’s clearly lagging. Amazon is about 5% off, not as bad as Apple, but still lagging the markets around it.

And Alphabet is the most interesting one, having surpassed its Oct 2018 level as early as March 20th (a sign of strength as the first one to break through that particular gate), and then making a new all-time high on the very same day as the S&P 500. But then it gave back significantly with a disappointing earnings reports, dropping about 7% on April 30th to land up back below its October 2018 levels.

These are all interesting data points, but let’s not get into the nitty-gritty. Instead, let’s just step back and recognize the big picture, that none of these are keeping up with either the S&P 500 or the Nasdaq 100. Outside of their independent nuances, this is the troubling fact, the perceived leaders are acting like laggards. Clearly, they are not the ones that the crowd is heaving themselves at.

Kam: I had not noticed those differentiated points. I once again wonder how much you can take from that single piece of information. Do you then resolve not to own these stocks?

Himelsein: Again, not necessarily. You are very right in that this is just a single piece of information. I would most certainly not give it conclusive weight, but I would realize that this is a starting point that already fails. While there is no perfect tell in the markets, there are indications that give us color as we delve deeper. It’s like the police would say, there’s no smoking gun, but they are a “person of interest.” This is an indicator of interest.

Once establishing “person of interest” status, the next thing to do is to start looking deeper, with a slight tilt toward skepticism given the existing status. After establishing person of interest status, the detective’s job is to assess more clues that align with the working theory, and where possible, more conclusive evidence. We need to do the same.

Kam: I hear that! What else do you see that moves you?

Himelsein: Another aspect that, from experience, I have come to believe is influential to the future path, is the shape of the behavior, which effectively, gives us insight into the way buyers and sellers behave. Much like raging new highs infers excitement or eagerness, other behaviors seem to reveal the thinking behind the scenes.

For example, Apple was sharp, from October to the December low it is straight down, and from that bottom, straight up; like a perfect “V” (although the right side not having reached the top of the left side). This, to me, demonstrates panic; panic to get out, and then once at a low enough level, a panic to get in. Apple has been the darling, so both buyers and sellers panic. And while the seller side is not so great, the buyer panic (of missing out) is definitely a good sign. But, then again, with all that panic to get into Apple from the bottom, it couldn’t even make it to its old high. Hhmmm.

In contrast, from its December 2018 low, Amazon just moved sideways for a while. From January 1 to mid-March, it went nowhere, just stuck range bound while it was making a decision. After it broke out on the upside in mid-March and continued with a healthy uptrend ever since we came to know that those prior months were consolidation; wherein market participants were patiently and thoughtfully consolidating their position, and their thoughts. This is methodical and I like it.

Lastly, Alphabet moved with similar intensity and sharpness to Apple, albeit not quite as rigorously. The difference is that Apple sold off 35%, so had further to recover, whereas Alphabet lost only 25% during the Q4 2018 correction, so had less to recover in 2019. More so, the 2019 uptrend included both some pullbacks and some consolidation, making its way up in a step-like fashion; aggressive but methodical. And then, unlike the others, achieved new highs.

Kam: It’s so frustrating because Alphabet seems like the healthiest, but then had a big drop after their earnings disappointment. Does this change things for you?

Himelsein: It often would, but not here. I like where it fell to, and I like where it stopped. The 1150 level that it fell to, and stopped at, is an important place, lining up with its March 28 pullback, its March 5th breakout, and its October ‘18 break-down. And to top all that off, its roughly the same place it stopped in the February ‘18 market run-up, for which it came right back to touch as early as mid-March. Alphabet likes this level. And I do too.

With all these ideas in mind, if I had to choose, I would buy Alphabet. I look at the gap down a few days ago as a buying opportunity.

And as for the other two, because they are so close, I’d wait to see if they get through their all-time highs. These levels may show resistance, but whether they do or don’t, there’s no reason not to wait and see whether this unknown transforms into a known. If they make it through, I would continue buying them on pullbacks. And if not, all bets are off until they get cheaper.

My Take: Whenever you make a lot of money in a stock, it is easy to fall in love with it and never want to sell. Selling feels like an act of disloyalty and then you have to pay taxes on the capital gain.

If your investment objective is to minimize taxes, the argument against selling can be compelling. However, if your objective is to become wealthy, then holding onto a stock that has already seen its best days is a mistake.

In sports, this is like betting on the San Francisco 49ers because Joe Montana led them to win four Super Bowl in the 80s. Today’s 49ers are an entirely different team so the fact that they did so well in the 80s does not tell you anything about their prospects for winning the next Super Bowl.

Similarly, prospects for Apple, Amazon, and Alphabet are not the same as they were 10 years ago. How you assess their current prospects should have nothing to do with how much you’ve made on these stocks.

If these three stocks are less than 30% of your portfolio, then I’d follow Wayne’s recommendation. However, if they are already more than 30% of your portfolio, I’d want to trim them back by selling into strength.

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