Market Insights & Analysis from Kramer Capital Research

Enjoy a Tale of Two Tech Titans in the Age of COVID

This was a watershed week for every investor who wanted to see how the global economy is weathering the coronavirus shutdown.

After a season of questions, we’re finally getting big answers from Silicon Valley and the results are mixed. I like transparency to see which companies are rising to the occasion and which companies are simply drifting, since it helps us pick future winners and losers in the market.

After all, we’ve lived through a period where a staggering 93% of all stocks have been pushed into 10% correction territory simply because investors no longer had any way to separate strength from weakness. Now we know.

Amazon Reaps the Retail Whirlwind

Let’s start at the top and see how a few of the world’s biggest technology companies are diverging as the pandemic drags on. Amazon.com Inc. (NASDAQ:AMZN) grabbed the spotlight once Wall Street figured out that people confronted with empty supermarket shelves could still shop online.

That’s the “new American economy” I’ve been talking about on my Millionaire Makers radio. Have you been listening? (Click here for recorded episodes and local stations.)

But the stock looks like the happy days are over for the time being. As it turns out, delivering all those boxes last quarter added no more than $2 billion to the sales that Amazon’s Chief Executive Officer (CEO) Jeff Bezos expected before the pandemic kicked in.

Three months ago, he was feeling pretty good about hitting $73 billion if everything went his way. He ended up with $75 billion. That’s real money to you and me, but it’s only an extra 2% on the growth rate. It doesn’t move the needle on a trillion-dollar company.

And when that nudge comes at the cost of wiping out ALL profit for the foreseeable future, it’s bad news. Keeping those packages flying is going to cost Amazon an extra $4 billion this quarter alone.

Extra expenses include protective masks and overtime for skittish employees in the warehouse. The company now is filling 175,000 emergency positions. More boxes than ever need to get filled and shipped, only now under “social distancing” rules. And what’s the reward for all that?

Bezos speculates that he might book $81 billion in revenue at the high-end this quarter. Wall Street was looking for $78 billion anyway. He is literally spending $4 billion in order to capture $3 billion at best.

No profit for the foreseeable future means no reason to buy the stock at a lofty $2,500. Now it’s below $2,400. When potential profit increases appeared ahead, we could make an informed decision whether the multiples worked out right. With no such extra profit, there is no need to do the math.

Rock-solid Apple

Mighty Apple Inc. (NASDAQ:AAPL) has reported, and all the coronavirus outbreak was able to do was keep the top line roughly where it was last year. That’s CEO Tim Cook’s achievement here. He held the line.

All the growth he was hoping to see in the quarter went up in smoke. Phone sales are still down 24% over the last two years. This is a declining business. Everyone can see that.

Even Cook’s greatest accounting tricks can’t hide the hole the fading iPhone boom leaves behind. His precious “services” are expanding 16% a year, and the Apple Watch is finally making Wearable Computing happen. But on both, the base is so low that all that growth barely balances weakness across the hardware side.

It is going to take another couple of seasons before the new business really come into its own. Until then, the best outcome Cook has been able to engineer, in this time of COVID-19, is a stall. That stall continues to this day. He won’t issue any guidance.

That said, it’s not the end of the world. People who want Apple gadgets are buying them online. As Tim Cook says, demand is picking up again. All he needs is for the economy to open again.

Meanwhile, he keeps buying back stock to make soft results look a little stronger. Apple clawed back 55 million shares last quarter, shrinking the float by another 1%. Over the last three years, the company has spent $232 billion on buybacks.

Tim Cook still has enough dry powder to keep it up for years. He just launched a fresh $50 billion repurchase program. There’s close to $200 billion on the balance sheet behind that. Apple isn’t going away any time soon. I just want to know if it’s going anywhere “interesting” in the immediate future.

It isn’t growing fast, but it isn’t collapsing either. Apple is now the kind of stock that forms the backbone of my Value Authority when the timing works out. But it’s a long way from the go-go growth days when the iPhone was the hottest thing on the planet.

Cannabis Corner: Short Sellers Stay Stubborn

It is an open secret that the Big Cannabis stocks have attracted a lot of opportunistic negativity. The industry took off too fast and now that the mood has gotten more realistic, it will take time to recover.

I remain bullish on the long term. The right portfolio of these stocks will make high-conviction investors very happy when the business matures.

For now, however, there isn’t a lot of instant gratification here beyond the occasional surge when the short sellers cover their positions. While consolidation is happening, it’s too slow to do anything more than relieve a little pressure.

It felt great for shareholders in Aurora Cannabis Corp. (NYSE:ACB), Canopy Growth Corp. (NYSE:CGC) and Tilray Inc. (NASDAQ:TLRY) when CannTrust Holdings Inc. lost its NASDAQ listing. But the bears still control the game here.

Roughly 20% of each of those companies is currently tied up in short contracts. That’s a direct indication of the level of negativity these stocks face.

When the cannabis bears cover, they come back for another ride to the downside. Elsewhere in the market, short sellers have a reason to be a lot more cautious.

Short interest for the S&P 500 as a whole rarely increases beyond 3% of the shares available. Anything more aggressive becomes a problem when the bets go against you.

That, of course, is the infamous short squeeze, when people who need shares fast to cover expiring positions pay high prices to exit. All it takes is long-term investors refusing to hand over their stock until the clock on the short side ticks down.

I don’t see a squeeze ahead for most of Big Cannabis because these stocks are liquid enough to give the bears plenty of opportunities. These shares are circulating. All the shorts need is to wait a day or two to accumulate what they seek.

One day the bulls will draw a firm line and the bears will need to surrender. When you see these stocks rally for a few days in a row, the odds are pretty good that the shorts are getting nervous.

Which company is at the forefront of “The Final Human Frontier”?
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