Yesterday, the Dow closed at its lowest level since 2020, with the Nasdaq and the S&P 500 also closing close to their lows from June. Whether you agree or disagree with what I said yesterday, that stocks may catch a bid and form a bounce of sorts this week, those levels will be catching the eye of investors who have been sitting on some cash. Even if you believe that we can still move lower, the previous low is a natural point at which to deploy some money. If you are a big tech investor and that is what you intend to do, where should that money go?
There are two basic approaches to buying on dips. The first is to look at the hardest-hit stocks on the basis that the further they have fallen, the further they will bounce back. The second is the opposite, where you favor things that have outperformed on the way down. The argument here is that they have done so because those companies have done relatively well in tough conditions and will only get stronger as things improve. There is a risk/reward element in this too. If everything bounces, the hard-hit stocks will presumably bounce further, but if your timing is off and we still keep going lower, they will probably continue to drop faster than the safer, less adventurous picks.
For some reason, not just in investing but in other things too, there is a tendency these days to see everything in that bifurcated way, as a stark choice between one thing or another and, as a result, the middle ground is often forgotten. When it comes to investing, however, which is largely about balancing risk and reward, combining two approaches is usually a better idea than going all in on one strategy. The goal is to smooth out the short-term volatility and achieve long-term gains that are better than average, and that is best achieved by not putting all your eggs in one basket.
In the world of big tech, the safe play on an outperformer is obvious, but that doesn’t mean that it doesn’t have value.
Apple (AAPL) is down only 17% from its high in January and had challenged that high both times stocks in general have rallied on the way down. I have talked before about why that is so, but they are points that are worth repeating, because they matter in this context.
Apple is not really a tech stock anymore. In fact, one could even argue that, despite producing high-end, “luxury” products, they are more of a consumer staples business than anything at this point. Apple customers are so loyal and so entwined in the company’s ecosystem that the question is not which brand of phone, tablet, or laptop they will buy, but which model. That means that while sales do ebb and flow to some extent with economic conditions, periods of weakness create pent up demand, and are usually followed by periods of strength.
My pick on the riskier side of things is Alphabet (GOOG, GOOGL). Like Apple, Alphabet has a dominant market share and incredible brand loyalty when it comes to their core product, Google’s search engine. The difference, though, is that they rely largely on ad revenue, and advertising spending is not deferred in tough times — it is simply canceled. If global economies continue to grind down or don’t bounce back quickly, Alphabet’s stock will continue to reflect that pain.
That makes GOOG riskier than AAPL, but as the stock is around 35% below its high, it clearly has more potential for long-term gains. Based on the fact that GOOG is trading at just over sixteen times forward earnings, though, roughly half what it was a year ago and 25% below the average for the Nasdaq, it could even be that if economic conditions just stabilize and the market starts to look forward to improvement, GOOG will bounce back. That may create some support if the market overall moves lower, and just a return to the index average forward P/E would result in a 25% jump.
If you are convinced that we are falling headlong into a deep recession, then of course, you will hold onto your cash, and even sell more assets if we do see a bounce this week. However, if you believe that the Fed will stop short of doing that kind of damage and can create a soft landing, then starting to dollar cost average back into big tech around the previous lows makes sense. If that is your view, then buying both an outperformer and a hard-hit stock is the best strategy and, in the world of big tech, AAPL and GOOG are stocks to consider as ways to do that.