Is Jim Cramer Right About Apple And Big Tech?
On Monday, September 21, The Street’s Jim Cramer took the plunge. Speaking on CNBC’s Mad Money, he offered the following perspective:
Jim was more specific, and mentioned that now is a good time to buy four particular Big Tech stocks: Apple, Microsoft, Amazon and Alphabet (tickers $AAPL, $MSFT, $AMZN and $GOOG $GOOGL). His timely optimism was backed by “attractive valuations after September declines”.
Might Jim Cramer be right about buying this piece of FAAMG (interestingly, no mention of Facebook) on weakness?
What is “cheap”?
First, of course, anyone can be wrong about the correct timing of a stock purchase. Only time will tell if Jim was right about his call. But that should not stop us from looking at some data and reaching some conclusions.
Jim’s call is clearly valuation-driven – although I am highly suspicious that he appreciates each of these four stocks for fundamental reasons too. Valuation is a tricky subject, since (1) each company’s business model, balance sheet profile and growth prospects warrant their unique valuation multiples and (2) the concept of “fair value” changes over time, along with factors like risk tolerance, interest rates, inflation expectations, etc.
One of my favorite ways to measure fair value is relative to a benchmark whose value also moves over time. For example: how cheap or expensive is Apple relative to the S&P 500 or the Nasdaq 100? This is exactly how I decided to assess Jim Cramer’s buy-the-dip suggestion.
FAAMG is still richly valued
Below is a graph that shows the difference, in percentage points, between the trailing 12-month returns of each of the four stocks mentioned above relative to the Nasdaq 100. I also added, in black, the same comparison between the S&P 500 and the tech-rich index. The graph covers the past full year.
Here are a few key observations from the data above:
- The S&P 500 is currently trailing the Nasdaq 100 by 21 percentage points over the past 12 months. This is close to record underperformance going back 15 years. In other words, any comparison between individual tech stocks and the Nasdaq is against an already richly-valued benchmark.
- Not all FAAMG stocks are valued similarly. For example, Alphabet’s shares are clearly less expensive relative to the Nasdaq than Apple shares are. The former has been trailing the index by nearly 17 percentage points over the past year, while the latter is still ahead of the Nasdaq by a whopping 70 percentage points.
- Microsoft and Alphabet have not underperformed the Nasdaq by this much for the past 12 months at least. These are likely to be the true buy-the-dip opportunities today.
- Apple and Amazon are still way ahead of the Nasdaq, despite the recent dip. In both cases, the recent pullback only brought them back to late July levels.
The Apple Maven’s take
Despite Big Tech having shed some market value recently, some of the stocks still look quite expensive relative to an already pricey Nasdaq index. If an investor thought that Apple or Amazon were stretched too thin only a couple of months ago, he or she must believe that both stocks are still expensive today.
Interestingly, Apple and Amazon (along with Microsoft, in the tech space) are two of my favorite companies and stocks. I would have no problem owning all of them. However, I am not ready to call either “a bargain”. Instead, I would advise anyone to think carefully before overweighing a portfolio into the Big Tech space at current levels.
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(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)