To the uninitiated investor, there seems nothing more insane than the contrasting behaviors of Apple and Amazon stocks.
Tuesday after the close, Amazon AMZN, -0.27% reported weak earnings, and the stock promptly went up about 9% in the aftermarket. Not many days ago, Apple AAPL, +0.21% reported reasonably good earnings after the close, and the stock promptly went down about 10%.
By some traditional measures, Amazon is extremely expensive and Apple is extremely inexpensive. Amazon trades at forward P/E of about 153 and the PEG ratio of negative 246.
Apple trades at forward P/E of about 9 and the PEG ratio of 0.73.
How does a very expensive stock going up on weak earnings and a very inexpensive stock going down on strong earnings make sense? Well, it makes perfect sense from both short-term and long-term perspectives.
From the short-term perspective, stocks move based on whisper numbers and sentiment.
It may take a few minutes to understand the deceptively simple looking charts of Apple and Amazon compared to sentiment normalized to price.
As they say, a picture is worth 1000 words, and in this case, the charts tell the story. For Apple, as the chart shows, the rise in bullish sentiment far exceeded the rise in the price of Apple stock. In quite a contrast, the bullish sentiment on Amazon has clearly no kept up with the price.
These two charts are perfect examples of how sentiment works as a contrary indicator.
There is a lot of wisdom to the old adage, “Stocks climb a wall of worry.” Going into earnings, there was a wall of worry to climb for Amazon, but there was no such wall for Apple. When the sentiment is negative, there is an availability of buyers to buy a stock and run it up higher; this is the case with Amazon. When the sentiment is overly positive, there are no buyers left to run the stocks up; this was the case with Apple.
In the short-term, in addition to the sentiment, whisper numbers play a big role. Whisper numbers are unofficial earnings estimates that circulate among Wall Street professionals and their most-favored clients. Astute investors know that stocks move based on the difference between actual reported numbers and whisper numbers, while investors focusing on published numbers are usually left holding the bag. It is important to analyze the difference in both the actual numbers and projections.
Amazon earnings are a perfect example of the foregoing in action. When the earnings were first announced, the stock fell over $18 to under $250, as those investors who were trading on published numbers sold the stock. Even though earnings were weak compared to the published numbers, they were better than the whisper numbers; smart money stepped in to take advantage of the weakness and ran the stock up to over $290.
There are different considerations that go into long-term analysis; based on such considerations the long-term behavior of Apple and Amazon stocks also makes perfect sense. I will detail these considerations in a future article.
Disclosure: Subscribers to The Arora Report are long Apple.