Despite the S&P 500 index finally getting above pre-COVID levels and closing at all-time highs, there are some warning lights starting to blink. It’s been a phenomenal summer for equities, one that was unimaginable during the dark days of Q1 when the likes of
Boeing (NYSE: BA) fell 75% in little more than a month. But with every up day in recent weeks, the voices calling for caution
have grown louder.
RSIs are starting to creep above 70, market breadth is dwindling and volume remains low. At Monday’s close, less than 60% of the S&P 500’s components were trading above their 200 day moving average. This means that a small number of heavy weights are largely responsible for the recent moves and this is not a good thing.
For example, over the past three weeks, Apple (NASDAQ: AAPL) has jumped more than 30% and watched its market cap move north of $2 trillion. It’s one year forward price-to-earnings (P/E) ratio is the highest it's been since 2007. Tesla (NASDAQ: TSLA), the electric car maker, has caused more than a few eyebrows to be raised as shares have popped more than 50% in just two weeks. Its market cap of $375 billion now outweighs effectively every other automotive company combined while it has just recently started to report regular revenue let alone profit.
These are the kind of conditions that have been present before the dot com bubble burst and last February.
So if these big names, who have effectively single-handedly dragged the S&P 500 to where it is now, start to cool off, then equities over all could be in for some volatility. And if that happens, here are 3 stocks I’ll be watching closely.
Be it a bull market or a bear market, companies need experts and consultants and Accenture is one of the biggest out there. Since IPO’ing in 2001, they’ve returned an annualized 16% year on year which, for a non-tech company, is impressive.
A 35% drop in March didn’t last long and shares had undone much of the damage by late June. Since then, they’ve printed weekly all time highs and have shown themselves to be a quality name for the long term. They even offer a dividend yield of 1.35%.
However, with a P/E ratio of 30, they definitely feel a little stretched at current prices. Were we to see a pullback in the coming weeks, Accenture would be a textbook high-quality stock to buy and own. They’re going nowhere and offer quality, high margin services that will always be in demand.
The coronavirus has done much to accelerate the shift to a cashless society as well as drive the e-commerce industry and Paypal is at the forefront of both revolutions. Their last earnings report showed 20 million new accounts which helped to push their total user base above 300 million for the first time.
The beauty of Paypal’s business model is that in order to keep growing, e-commerce companies need to offer Paypal as a payment option. Their success feeds off the success of other e-commerce companies or even traditional retail names which are making the shift to digital sales.=
However, with its RSI flirting with 80 last week, shares definitely feel a little hot right now with much of COVID-19’s upside already baked in. A P/E ratio of 90 is also well above the long term average of 50 so if future earnings don’t justify the recent hype, those of us still on the sidelines should have a good opportunity to buy-in.
This is the behemoth that constantly defies expectations but can boast an annualized return of 45% over the past five years. Amazon has come to define what e-commerce is and the benchmark against which other companies are judged. It’s established itself as the market leader in an industry that is only going to continue to grow and has few, if any, competitors who pose a real threat.
The coronavirus has pushed more people than ever to become customers and with the realization that your week’s shopping can be done from an iPhone, many will never go back to brick and mortar based stores. As was reported yesterday, “if there was a “stock of the century” award, Amazon would be the favorite”.
If there’s a general pull back and a return of risk-off sentiment, Amazon will certainly see its fair share of selling. But based on previous corrections, the discounted prices won’t last long. Compared to some of its peers, shares only fell 25% last March and were one of the first to bounce off the lows, so if you’re working an entry then, don’t hang around.
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