Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Wednesday, Feb. 5. Happy Hump Day! Today’s Stocks On The Contrarian Radar©️ segment features GOOG 0.00%↑/ GOOGL 0.00%↑ and can be read at the bottom of this page.
Be sure to read the monthly portfolio update!
State of Play
Stocks rallied yesterday, led by tech. There was unfortunately some bad news after the close from tech land as Google/Alphabet earnings disappointed investors. As we eye our board of indicators for signs of direction at 0640, that is weighing on markets:
Stock index futures are pointing to a lower open, led by tech. It actually wasn’t just Google but also AMD (AMD 0.00%↑) that is weighing on things. The Nasdaq is down 0.9%. S&P 500 futures are down 0.5%;
Bonds are seeing a few bids for some reason. The 10-year yield is down 4 basis points to 4.47% (yields move inversely to prices);
Cryptos aren’t doing much. Bitcoin is unchanged trading around $98,000;
Commodities are pretty quiet as well. WTI crude oil is down 0.7% to trade around $72/barrel. Copper is unchanged.
Today’s Known Events
Earnings get us started again:
Disney (DIS 0.00%↑) just reported mixed results but is still up a bit in the pre-market;
Toyota Motor (TM 0.00%↑) earlier reported results that appear to have impressed investors and that stock is moving higher in the pre-market.
Uber (UBER 0.00%↑) is also due before the open at 0930;
After the close at 1600 we’ll hear Arm Holdings (ARM 0.00%↑), Qualcomm (QCOM 0.00%↑) and Ford (F 0.00%↑) among others.
In terms of economic data, we get ISM non-manufacturing PMIs at 1000. Economists who were surveyed expect a reading of 54.2, effectively in line with the 54.0 recorded last month.
One Fed speaker The Contrarian was able to confirm: Chicago Fed President Austan Goolsbee at 1430 ET.
There is of course also the matter of the Sino-US trade war. Unlike the US-Mexico and US-Canada matches, this one does not appear to be going anywhere.
The Bottom Line
Jittery signs from tech but the pre-market drop is not really anything to get worried about. On Monday morning things were looking far worse with the tariff shock. The fact that cryptos are languishing is maybe the more telling sign in terms of overall risk appetite.
The Sino-US trade war appears to be escalating. Latest news there is that Chinese regulators are considering a probe into Apple (AAPL 0.00%↑) App Store practices. Consider this a reminder that trade wars can involve different weapons, especially when you have the Chinese Communist Party involved.
Trade war stuff can and will drag on stocks. That can easily be reversed with a “making progress on China trade talks” tweet from the White House. That was the pattern from 2017 through 2019. Makes sense that it would be the same again now…
Stocks On The Contrarian Radar©️
Google/Alphabet is dropping in the pre-market after reporting earnings:
As you can see from the orange “Pre” line above, this knocks GOOGL (we’re using the A shares here, just for simplicity’s sake) right down to its lowest level of the year. It’s a big drop in percentage terms (7%) but in the grand scheme of things it isn’t terribly dramatic.
What happened with earnings? For one, revenues missed expectations. Never a good thing. There is also the issue of capital outlay. Google announced that it would invest an additional $75 billion, largely in AI, this year. That kind of expense scares investors.
The good news is advertising revenues are holding up, effectively unchanged from a year ago. So much for Chat GPT and the others eating Google’s lunch on that front. People apparently still like to, well, google.
ITO valuation, GOOGL does not appear to be screaming cheap, trading at:
23x forward earnings
6.5x forward sales
17x forward cash flows
Unfortunately Google’s valuation metrics are no less persuasive on a historical basis. Price/sales, price/earnings, and price/gross profits are all near multi-year highs.
If you hold GOOGL up against the S&P (SPY 0.00%↑) and Nasdaq 100 (QQQ 0.00%↑) it looks like the best buying opportunity may have already passed:
Even with the pre-market drop, GOOGL is outpacing the two indexes over recent months, thanks largely to a breakout that came in early December.
So the overnight price drop, while enticing, does not make the stock screaming cheap. One could have made the argument late last year that that was the case. Now, not so much.
Surely Google is still one of the world’s leading companies. It will surely grow in the future. Will it grow enough to justify these valuations? Maybe. But the risk/reward is not enticing enough for The Contrarian to buy.
Full Disclosure: The Contrarian is long GOOGL after building the position late last year. Average price of around $182.
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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